particular cost centers to which distribution is appropriate. Each
such pool or cost grouping should then be distributed individually
to the related cost centers, using the distribution base or method
most appropriate in the light of the guides set out in 2.c. below.
While this paragraph places primary emphasis on a step-down method
of indirect cost computation, paragraph H. provides an alternate
method which may be used under certain conditions.
    c. Selection of distribution method.
    Actual conditions must be taken into account in selecting the
method or base to be used in distributing to related cost centers
the expenses assembled under each of the individual cost groups
established as indicated under 2.b. above. Where a distribution can
be made by assignment of a cost grouping directly to the area
benefited, the distribution should be made in that manner. Care
should be given, however, to eliminate similar or duplicative costs
from any other distribution made to this area. Where the expenses
under a cost grouping are more general in nature, the distribution
to related cost centers should be made through use of a selected
base which will produce results which are equitable to both the
Government and the hospital. In general, any cost element or cost-
related factor associated with the hospital's work is potentially
adaptable for use as a distribution base provided:
    (1) It can readily be expressed in terms of dollars or other
quantitative measure (total direct expenditures, direct salaries,
man-hours applied, square feet utilized, hours of usage, number of
documents processed, population served, and the like); and
    (2) It is common to the related cost centers during the base
period. The essential consideration in selection of the distribution
base in each instance is that it be the one best suited for
assigning the pool of costs to related cost centers in accord with
the relative benefits derived; the traceable cause and effect
relationship; or logic and reason, where neither benefit nor cause
and effect relationship is determinable.
    d. General consideration on cost groupings.
    The extent to which separate cost groupings and selective
distribution would be appropriate at a hospital is a matter of
judgment to be determined on a case-by-case basis. Typical
situations which may warrant the establishment of two or more
separate cost groups (based on account classification or analysis)
within a functional category include but are not limited to the
following:
    (1) Where certain items or categories of expense relate solely
to one of the major divisions of the hospital (patient care,
sponsored research, instruction and training, or other hospital
activities) or to any two but not all, such expenses should be set
aside as a separate cost grouping for direct assignment or selective
distribution in accordance with the guides provided in 2.b. and
2.c.above.
    (2) Where any types of expense ordinary treated as indirect cost
as outlined in paragraph are charged to research agreements as
direct costs, the similar type expenses applicable to other
activities of the institution must through separate cost grouping be
excluded from the indirect costs allocable to research agreements.
    (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 and other hospital activities.
    (4) Where organized activities (including identifiable segments
of organized research as well as the activities cited inB.5.)
provide their own purchasing, personnel administration, building
maintenance, or housekeeping or similar service, the distribution of
such elements of indirect cost to such activities should be
accomplished through cost grouping which includes only that portion
of central indirect costs (such as for overall management) which are
properly allocable to such activities.
    (5) Where the hospital elects to treat as indirect charges the
costs of pension plans and other staff benefits, such costs should
be set aside as a separate cost grouping for selective distribution
to related cost centers, including organized research.
    (6) Where the hospital is affiliated with a medical school or
some other institution which performs organized research on the
hospital's premises, every effort should be made to establish
separate cost groupings in the Administrative and General or other
applicable category which will reasonably reflect the use of
services and facilities by such research. (See also paragraph.)
    e. Materiality.
    Where it is determined that the use of separate cost groupings
and selective distribution are necessary to produce equitable
results, the number of such separate cost groupings within a
functional 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.

3. Administration of Limitations on Allowances for Indirect Costs

    a. Research grants may be subject to laws and/or administrative
regulations that limit the allowance for indirect costs under each
such grant to a stated percentage of the direct costs allowed.
Agencies that sponsor such grants will establish procedures which
will assure that:
    (1) The terms and amount authorized in each case conform with
the provisions of paragraphs C, E, and I of these principles as they
apply to matters involving the consistent treatment and allowability
of individual items of cost; and
    (2) The amount actually allowed for indirect costs under each
such research grant does not exceed the maximum allowable under the
limitation or the amount otherwise allowable under these principles,
whichever is the smaller.
    b. Where the actual allowance for indirect costs on any research
grant must be restricted to the smaller of the two alternative
amounts referred to in 3.a. above, such alternative amounts should
be determined in accordance with the following guides:
    (1) The maximum allowable under the limitation should be
established by applying the stated percentage to a direct cost base
which shall include all items of expenditure authorized by the
sponsoring agency for inclusion as part of the total cost for the
direct benefit of the work under the grant; and
    (2) The amount otherwise allowable under these principles should
be established by applying the current institutional indirect cost
rate to those elements of direct cost which were included in the
base on which the rate was computed.
    c. When the maximum amount allowable under a statutory
limitation or the terms of a research agreement is less than the
amount otherwise allocable as indirect costs under these principles,
the amount not recoverable as indirect costs under the research
agreement involved may not be shifted to other research agreements.

F. Identification and Assignment of Indirect Costs

1. Depreciation or Use Charge

    a. The expenses under this heading should include depreciation
(as defined in paragraph I.2.i(1)) on buildings, fixed equipment,
and movable equipment, except to the extent purchased through
federal funds. Where adequate records for the recording of
depreciation are not available, a use charge may be substituted for
depreciation (See paragraph I.2.)
    b. The expenses included in this category should be allocated to
applicable cost centers in a manner consistent with the guides set
forth in paragraph E.2., on a basis that gives primary emphasis to
(a) space utilization with respect to depreciation on buildings and
fixed equipment; and (b) specific identification of assets and their
use with respect to movable equipment as it relates to patient care,
organized research, instruction and training, and other hospital
activities. Where such records are not sufficient for the purpose of
the foregoing, reasonable

estimates will suffice as a means for effecting distribution of the
amounts involved.

2. Administration and General Expenses

    a. The expenses under this heading are those that have been
incurred for the administrative offices of the hospital including
accounting, personnel, purchasing, information centers, telephone
expense, and the like which do not relate solely to any major
division of the institution, i.e., solely to patient care, organized
research, instruction and training, or other hospital activities.
    b. The expenses included in this category may be allocated on
the basis of total expenditures exclusive of capital expenditures,
or salaries and wages in situations where the results of the
distribution made on this basis are deemed to be equitable both to
the Government and the hospital; otherwise the distribution of
Administration and General expenses should be made through use of
selected bases, applied to separate cost groupings established
within this category of expenses in accordance with the guides set
out in paragraph E.2.

3. Operation of Plant

    a. The expenses under this heading are those that have been
incurred by a central service organization or at the departmental
level for the administration, supervision, and provision of
utilities (exclusive of telephone expense) and protective services
to the physical plant. They include expenses incurred for such items
as power plant operations, general utility costs, elevator
operations, protection services, and general parking lots.
    b. The expenses included in this category should be allocated to
applicable cost centers in a manner consistent with the guides
provided in paragraph E.2., on a basis that gives primary emphasis
to space utilization. The allocations should be developed as
follows:
    (1) Where actual space and related cost records are available or
can readily be developed and maintained without significant change
in the accounting practices, the amount distributed should be based
on such records;
    (2) Where the space and related cost records maintained are not
sufficient for purposes of the foregoing, a reasonable estimate of
the proportion of total space assigned to the various costs centers
normally will suffice as a means for effecting distribution of the
amounts involved; or
    (3) Where it can be demonstrated that an area or volume or space
basis of allocation is impractical or inequitable, other bases may
be used provided consideration is given to the use of facilities by
research personnel and others, including patients.

4. Maintenance of Plant

    a. The expenses under this heading should include:
    (1) All salaries and wages pertaining to ordinary repair and
maintenance work performed by employees on the payroll of the
hospital;
    (2) All supplies and parts used in the ordinary repairing and
maintaining of buildings and general equipment; and
    (3) Amounts paid to outside concerns for the ordinary repairing
and maintaining of buildings and general equipment.
    b. The expenses included in this category should be allocated to
applicable cost centers in a manner consistent with the guides
provided in paragraph E.2. on a basis that gives primary emphasis to
space utilization. The allocations and apportionments should be
developed as follows:
    (1) Where actual space and related cost records are available
and can readily be developed and maintained without significant
change in the accounting practices, the amount distributed should be
based on such records;
    (2) Where the space and related cost records maintained are not
sufficient for purposes of the foregoing, a reasonable estimate of
the proportion of total space assigned to the various cost centers
normally will suffice as a means for effecting distribution of the
amounts involved; or
    (3) Where it can be demonstrated that an area or volume of space
basis of allocation is impractical or inequitable, other basis may
be used provided consideration is given to the use of facilities by
research personnel and others, including patients.

5. Laundry and Linen

    a. The expenses under this heading should include:
    (1) Salaries and wages of laundry department employees,
seamstresses, clean linen handlers, linen delivery men, etc.;
    (2) Supplies used in connection with the laundry operation and
all linens purchased; and
    (3) Amounts paid to outside concerns for purchased laundry and/
or linen service.
    b. The expense included in this category should be allocated to
related cost centers in a manner consistent with the guides provided
in paragraph E.2. on a basis that gives primary emphasis to actual
pounds of linen used. The allocations should be developed as
follows:
    (1) Where actual poundage and related cost records are available
or can readily be developed and maintained without significant
change in the accounting practices, the amount distributed should be
based on such records;
    (2) Where it can be demonstrated that a poundage basis of
allocation is impractical or inequitable other bases may be used
provided consideration is given to the use of linen by research
personnel and others, including patients.

6. Housekeeping

    a. The expenses under this heading should include:
    (1) All salaries and wages of the department head, foreman,
maids, porters, janitors, wall washers, and other housekeeping
employees;
    (2) All supplies used in carrying out the housekeeping
functions; and
    (3) Amounts paid to outside concerns for purchased services such
as window washing, insect extermination, etc.
    b. The expenses included in this category should be allocated to
related cost centers in a manner consistent with the guides provided
in paragraph E.2. on a basis that gives primary emphasis to space
actually serviced by the housekeeping department. The allocations
and apportionments should be developed as follows:
    (1) Where actual space serviced and related cost records are
available or can readily be developed and maintained without
significant change in the accounting practices, the amount
distributed should be based on such records;
    (2) Where the space serviced and related cost records maintained
are not sufficient for purposes of the foregoing, a reasonable
estimate of the proportion of total space assigned to the various
cost centers normally will suffice as a means for effecting
distribution of the amounts of housekeeping expenses involved; or
    (3) Where it can be demonstrated that the space serviced basis
of allocation is impractical or inequitable, other bases may be used
provided consideration is given to the use of housekeeping services
by research personnel and others, including patients.

7. Dietary

    a. These expenses, as used herein, shall mean only the subsidy
provided by the hospital to its employees including research
personnel through its cafeteria operation. The hospital must be able
to demonstrate through the use of proper cost accounting techniques
that the cafeteria operates at a loss to the benefit of employees.
    b. The reasonable operating loss of a subsidized cafeteria
operation should be allocated to related cost centers in a manner
consistent with the guides provided in paragraph E.2. on a basis
that gives primary emphasis to number of employees.

8. Maintenance (Housing) of Personnel

    a. The expenses under this heading should include:
    (1) The salaries and wages of matrons, clerks, and other
employees engaged in work in nurses' residences and other employees'
quarters;
    (2) All supplies used in connection with the operation of such
dormitories; and
    (3) Payments to outside agencies for the rental of houses,
apartments, or rooms used by hospital personnel.
    b. The expenses included in this category should be allocated to
related cost centers in a manner consistent with the guides provided
in paragraph E.2. on a basis that gives primary emphasis to employee
utilization of housing facilities. The allocation should be
developed as follows:
    (1) Appropriate credit should be given for all payments received
from employees or otherwise to reduce the expense to be allocated;
    (2) A net cost per housed employee may then be computed; and
    (3) Allocation should be made on a departmental basis based on
the number of housed employees in each respective department.

9. Medical Records and Library

    a. The expenses under this heading should include:
    (1) The salaries and wages of the records librarian, medical
librarian, clerks, stenographers, etc.; and

    (2) All supplies such as medical record forms, chart covers,
filing supplies, stationery, medical library books, periodicals,
etc.
    b. The expenses included in this category should be allocated to
related cost centers in a manner consistent with the guides provided
in paragraph E.2. on a basis that gives primary emphasis to a
special time survey of medical records personnel. If this appears to
be impractical or inequitable, other bases may be used provided
consideration is given to the use of these facilities by research
personnel and others, including patients.

G. Determination and Application of Indirect Cost Rate or Rates

1. Indirect Cost Pools

    a. Subject to b. below, indirect costs allocated to organized
research should be treated as a common pool, and the costs in such
common pool should be distributed to individual research agreements
benefiting therefrom on a single rate basis.
    b. In some instances a single rate basis for use on all
government research at a hospital may not be appropriate since it
would not take into account those different environmental factors
which may affect substantially the indirect costs applicable to a
particular segment of government research at the institution. For
this purpose, a particular segment of government research may be
that performed under a single research agreement or it may consist
of research under a group of research 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 government
research is performed within an environment which appears to
generate a significantly different level of indirect costs,
provision should be made for a separate indirect cost pool
applicable to such work. An example of this differential may be in
the development of a separate indirect cost pool for a clinical
research center grant. The separate indirect cost pool should be
developed during the course of the regular distribution 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 obtained under a. above; and
    (2) The volume of research work to which such rate would apply
is material in relation to other government research at the
institution.
    c. It is a common practice for grants or contracts awarded to
other institutions, typically University Schools of Medicine, to be
performed on hospital premises. In these cases the hospital should
develop a separate indirect cost pool applicable to the work under
such grants or contracts. This pool should be developed by a
selective distribution of only those indirect cost categories which
benefit the work performed by the other institution, within the
practical limits dictated by available data and the materiality of
the amounts involved. Hospital costs determined to be allocable to
grants or contracts awarded to another institution may not be
recovered as a cost of grants or contracts awarded directly to the
hospital.

2. The Distribution Base

    Preferably, indirect costs allocated to organized research
should be distributed to applicable research agreements on the basis
of direct salaries and wages. However, where the use of salaries and
wages results in an inequitable allocation of costs to the research
agreements, total direct costs or a variation thereof, may be used
in lieu of salaries and wages. Regardless of the base used, an
indirect cost rate should be determined for each of the separate
indirect cost pools developed pursuant to paragraph G.1. The rate in
each case should be stated as the percentage which the amount of the
particular indirect cost pool is of the total direct salaries and
wages (or other base selected) for all research agreements
identified with such a pool.

3. Negotiated Lump Sum for Overhead

    A negotiated fixed amount in lieu of indirect costs may be
appropriate for self-contained or off-campus research activities
where the benefits derived from a hospital's indirect services
cannot be readily determined. Such amount negotiated in lieu of
indirect costs will be treated as an offset to the appropriate
indirect cost pool after allocation to patient care, organized
research, instruction and training, and other hospital activities.
The base on which such remaining expenses are allocated should be
appropriately adjusted.

4. Predetermined Overhead Rates

    The utilization of predetermined fixed overhead rates may offer
potential advantages in the administration of research agreements by
facilitating the preparation of research budgets and permitting more
expeditious close out of the agreements when the work is completed.
Therefore, to the extent allowed by law, consideration may be given
to the negotiation of predetermined fixed rates in those situations
where the cost experience and other pertinent factors available are
deemed sufficient to enable the Government and the hospital to reach
a reasonable conclusion as to the probable level of the indirect
cost rate for the ensuing accounting period.

H. Simplified Method for Small Institutions

1. General

    a. Where the total direct cost of all government-sponsored
research and development work at a hospital in a year is minimal,
the use of the abbreviated procedure described in paragraph H.2.
below may be acceptable in the determination of allowable indirect
costs. This method may also be used to initially determine a
provisional indirect cost rate for hospitals that have not
previously established a rate. Under this abbreviated procedure,
data taken directly from the institution's most recent annual
financial report and immediately available supporting information
will be utilized as a basis for determining the indirect cost rate
applicable to research agreements at the institution.
    b. The rigid formula approach provided under the abbreviated
procedure has limitations which may preclude its use at some
hospitals either because the minimum data required for this purpose
are not readily available or because the application of the
abbreviated procedure to the available data produces results which
appear inequitable to the Government or the hospital. In any such
case, indirect costs should be determined through use of the regular
procedure rather than the abbreviated procedure.
    c. In certain instances where the total direct cost of all
government-sponsored research and development work at the hospital
is more than minimal, the abbreviated procedure may be used if prior
permission is obtained. This alternative will be granted only in
those cases where it can be demonstrated that the step-down
technique cannot be followed.

2. Abbreviated Procedure

    a. Total expenditures as taken from the most recent annual
financial report will be adjusted by eliminating from further
consideration expenditures for capital items as defined in paragraph
I.2.d. and unallowable costs as defined under various headings in
paragraph I. and paragraph C.5.
    b. Total expenditures as adjusted under the foregoing will then
be distributed among (1) expenditures applicable to administrative
and general overhead functions, (2) expenditures applicable to all
other overhead functions, and (3) expenditures for all other
purposes. The first group shall include amounts associated with the
functional categories, Administration and General, and Dietary, as
defined in paragraphs F.2. and 7. The second group shall include
Depreciation, Operation of Plant, Maintenance of Plant, and
Housekeeping. The third group--expenditures for all other purposes--
shall include the amounts applicable to all other activities,
namely, patient care, organized research, instruction and training,
and other hospital activities as defined under paragraph B.5. For
the purposes of this section, the functional categories of Laundry
and Linen, Maintenance of Personnel, and Medical Records and Library
as defined in paragraph E. shall be considered as expenditures for
all other purposes.
    c. The expenditures distributed to the first two groups in
paragraph H.2.b. should then be adjusted by those receipts or
negative expenditure types of transactions which tend to reduce
expense items allocable to research agreements as indirect costs.
Examples of such receipts or negative expenditures are itemized in
paragraph C.5.a.
    d. In applying the procedures in paragraphs H.2.a and 2.b, the
cost of unallowable activities such as Gift Shop, Investment
Property Management, Fund Raising, and Public Relations, when they
benefit from the hospital's indirect cost services, should be
treated as expenditures for all other purposes. Such activities are
presumed to benefit from the hospital's indirect cost services when
they include salaries of personnel working in the hospital.

When they do not include such salaries, they should be eliminated
from the indirect cost rate computation.
    e. The indirect cost rate will then be computed in two stages.
The first stage requires the computation of an Administrative and
General rate component. This is done by applying a ratio of research
direct costs over total direct costs to the Administrative and
General pool developed under paragraphs H.2.b and 2.c. above. The
resultant amount--that which is allocable to research--is divided by
the direct research cost base. The second stage requires the
computation of an All Other Indirect Cost rate component. This is
done by applying a ratio of research direct space over total direct
space to All Other Indirect Cost pool developed under paragraphs
H.2.b. and 2.c. above. The resultant amount--that which is allocable
to research--is divided by the direct research cost base.
    The total of the two rate components will be the institution's
indirect cost rate. For the purposes of this section, the research
direct cost or space and total direct cost or space will be that
cost or space identified with the functional categories classified
under Expenditures for all other purposes under paragraph H.2.b.

I. General Standards for Selected Items of Cost

1. General

    This section provides standards to be applied in establishing
the allowability of certain items involved in determining cost.
These standards 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 in the standards 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 or standards provided for similar or related
items of cost. In case of discrepancy between the provisions of a
specific research agreement and the applicable standards provided,
the provisions of the research agreement should govern. However, in
some cases advance understandings should be reached on particular
cost items in order that the full costs of research be supported.
The extent of allowability of the selected items of cost covered in
this section has been stated to apply broadly to many accounting
systems in varying environmental situations. Thus, as to any given
research agreement, the reasonableness and allocability of certain
items of costs may be difficult to determine, particularly in
connection with hospitals which have medical school or other
affiliations. In order to avoid possible subsequent disallowance or
dispute based on unreasonableness or nonallocability, it is
important that prospective recipients of federal funds, particularly
those whose work is predominantly or substantially with the
Government, seek agreement with the Government in advance of the
incurrence of special or unusual costs in categories where
reasonableness or allocability are difficult to determine. Such
agreement may also be initiated by the Government. Any such
agreement should be incorporated in the research agreement itself.
However, the absence of such an advance agreement on any element of
cost will not in itself serve to make that element either allowable
or unallowable. Examples of costs on which advance agreements may be
particularly important are:
    a. Facilities costs, such as;
    (1) Depreciation
    (2) Rental
    (3) Use charges for fully depreciated assets
    (4) Idle facilities and idle capacity
    (5) Plant reconversion
    (6) Extraordinary or deferred maintenance and repair
    (7) Acquisition of automatic data processing equipment.
    b. Pre-award costs
    c. Non-hospital professional activities
    d. Self-insurance
    e. Support services charged directly (computer services,
printing and duplicating services, etc.)
    f. Employee compensation, travel, and other personnel costs,
including:
    (1) Compensation for personal service, including wages and
salaries, bonuses and incentives, premium payments, pay for time not
worked, and supplementary compensation and benefits, such as pension
and retirement, group insurance, severance pay plans, and other
forms of compensation;
    (2) Morale, health, welfare, and food service and dormitory
costs.
    (3) Training and education costs.
    (4) Relocation costs, including special or mass personnel
movement.

2. Selected Items

    a. Advertising costs. 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. The only advertising costs
allowable are those which are solely for:
    (1) The recruitment of persons required for the performance by
the institution of obligations arising under the research agreement,
when considered in conjunction with all other recruitment costs as
set forth in paragraph I.2.hh;
    (2) The procurement of scarce items for the performance of the
research agreement; or
    (3) The disposal of scrap or surplus materials acquired in the
performance of the research agreement.
    Costs of this nature, if incurred for more than one research
agreement or for both research agreement work and other work of the
institution, are allowable to the extent that the principles in
paragraphs D. and E. are observed.
    b. Bad debts. Losses arising from uncollectible accounts and
other claims and related collection and legal costs are unallowable
except that a bad debt may be included as a direct cost of the
research agreement to the extent that it is caused by a research
patient and approved by the awarding agency. This inclusion is only
intended to cover the situation of the patient admitted for research
purposes who subsequently or in conjunction with the research
receives clinical care for which a charge is made to the patient.
If, after exhausting all means of collecting these charges, a bad
debt results, it may be considered an appropriate charge to the
research agreement.
    c. Bonding costs.
    (1) Bonding costs arise when the Government requires assurance
against financial loss to itself or others by reason of the act or
default of the hospital. They arise also in instances where the
hospital requires similar assurance.
    Included are such types as bid, performance, payment, advance
payment, infringement, and fidelity bonds.
    (2) Costs of bonding required pursuant to the terms of the
research agreement are allowable.
    (3) Costs of bonding required by the hospital in the general
conduct of its business are allowable to the extent that such
bonding is in accordance with sound business practice and the rates
and premiums are reasonable under the circumstances.
    d. Capital expenditures. The costs of equipment, buildings, and
repairs which materially increase the value or useful life of
buildings or equipment should be capitalized and are unallowable
except as provided for in the research agreement.
    e. 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, fire-fighting 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 provisions set forth elsewhere. Costs of local
civil defense projects not on the institution's premises are
unallowable.
    f. Communication costs. Costs incurred for telephone services,
local and long distance telephone calls, telegrams, radiograms,
postage, and the like are allowable.
    g. Compensation for personal services.

(1) General

    Compensation for personal services covers all remuneration paid
currently or accrued to employees of the hospital for services
rendered during the period of performance under government research
agreements. Such remuneration includes salaries, wages, staff
benefits (see paragraph I.2.j.), and pension plan costs (see
paragraph I.2.y.). The costs of such remuneration are allowable to
the extent that the total compensation to individual employees is
reasonable for the services rendered and conforms to the established
policy of the institution consistently applied, and provided that
the charges for work performed directly on government research
agreements and for other work allocable as indirect costs to
sponsored research are determined and supported as hereinafter
provided. For non-profit, non-proprietary institutions, where
federally supported programs constitute less

than a preponderance of the activity at the institution the primary
test of reasonableness will be to require that the institution's
compensation policies be applied consistently both to federally-
sponsored and non-sponsored activities alike. However, where special
circumstances so dictate a contractual clause may be utilized which
calls for application of the test of comparability in determining
the reasonableness of compensation.

(2) Payroll Distribution

    Amounts charged to organized research for personal services,
regardless of whether treated as direct costs or allocated as
indirect costs, will be based on hospital payrolls which have been
approved and documented in accordance with generally accepted
hospital practices. In order to develop necessary direct and
indirect allocations of cost, supplementary data on time or effort
as provided in paragraph (3) below, normally need be required only
for individuals whose compensation is properly chargeable to two or
more research agreements or to two or more of the following broad
functional categories: (i) Patient care; (ii) organized research;
(iii) instruction and training; (iv) indirect activities as defined
in paragraph E.1.; or (v) other hospital activities as defined in
paragraph B.5.

(3) Reporting Time or Effort

    Charges for salaries and wages of individuals other than members
of the professional staff will be supported by daily time and
attendance and payroll distribution records. For members of the
professional staff, current and reasonable estimates of the
percentage distribution of their total effort may be used as support
in the absence of actual time records. The term professional staff
for purposes of this section includes physicians, research
associates, and other personnel performing work at responsible
levels of activities. These personnel normally fulfill duties, the
competent performance of which usually requires persons possessing
degrees from accredited institutions of higher learning and/or state
licensure. In order to qualify as current and reasonable, estimates
must be made no later than one month (though not necessarily a
calendar month) after the month in which the services were
performed.

(4) Preparation of Estimates of Effort

    Where required under paragraph (3) above, estimates of effort
spent by a member of the professional staff on each research
agreement should be prepared by the individual who performed the
services or by a responsible individual such as a department head or
supervisor having first-hand knowledge of the services performed on
each research agreement. Estimates must show the allocation of
effort between organized research and all other hospital activities
in terms of the percentage of total effort devoted to each of the
broad functional categories referred to in (2) above. The estimate
of effort spent on a research agreement may include a reasonable
amount of time spent in activities contributing and intimately
related to work under the agreement, such as preparing and
delivering special lectures about specific aspects of the ongoing
research, writing research reports and articles, participating in
appropriate research seminars, consulting with colleagues with
respect to related research, and attending appropriate scientific
meetings and conferences. The term ``all other hospital activities''
would include departmental research, administration, committee work,
and public services undertaken on behalf of the hospital.

(5) Application of Budget Estimates

    Estimates determined before the performance of services, such as
budget estimates on a monthly, quarterly, or yearly basis do not
qualify as estimates of effort spent.

(6) Non-Hospital Professional Activities

    A hospital must not alter or waive hospital-wide policies and
practices dealing with the permissible extent of professional
services over and above those traditionally performed without extra
hospital compensation, unless such arrangements are specifically
authorized by the sponsoring agency. Where hospital-wide policies do
not adequately define the permissible extent of consultantships or
other non-hospital activities undertaken for extra pay, the
Government may require that the effort of professional staff working
under research agreements be allocated as between (i) hospital
activities, and (ii) non-hospital professional activities. If the
sponsoring agency should consider the extent of non-hospital
professional effort excessive, appropriate arrangements governing
compensation will be negotiated on a case by case basis.

(7) Salary Rates for Part-Time Appointments

    Charges for work performed on government research by staff
members having only part-time appointments will be determined at a
rate not in excess of that for which he is regularly paid for his
part-time staff assignment.
    h. Contingency provisions.
    Contributions to a contingency reserve or any similar provisions
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.
    i. Depreciation and use allowances.
    (1) Hospitals may be compensated for the use of buildings,
capital improvements and usable equipment on hand through
depreciation or use allowances. Depreciation is a charge to current
operations which distributes the cost of a tangible capital asset,
less estimated residual value, over the estimated useful life of the
asset in a systematic and logical manner. It does not involve a
process of valuation. Useful life has reference to the prospective
period of economic usefulness in the particular hospital's
operations as distinguished from physical life. Use allowances are
the means of allowing compensation when depreciation or other
equivalent costs are not considered.
    (2) Due consideration will be given to government-furnished
research facilities utilized by the institution when computing use
allowances and/or depreciation if the government-furnished research
facilities are material in amount. Computation of the use allowance
and/or depreciation will exclude both the cost or any portion of the
cost of grounds, buildings and equipment borne by or donated by the
Federal Government, irrespective of where title was originally
vested or where it presently resides, and secondly, the cost of
grounds. Capital expenditures for land improvements (paved areas,
fences, streets, sidewalks, utility conduits, and similar
improvements not already included in the cost of buildings) are
allowable provided the systematic amortization of such capital
expenditures has been provided in the institution's books of
accounts, based on reasonable determinations of the probable useful
lives of the individual items involved, and the share allocated to
organized research is developed from the amount thus amortized for
the base period involved.
    (3) Normal depreciation on a hospital's plant, equipment, and
other capital facilities, except as excluded by (4) below, is an
allowable element of research cost provided that the amount thereof
is computed:
    i. Upon the property cost basis used by the hospital for Federal
Income Tax purposes (See section 167 of the Internal Revenue Code of
1954); or
    ii. In the case of non-profit or tax exempt organizations, upon
a property cost basis which could have been used by the hospital for
Federal Income Tax purposes, had such hospital been subject to the
payment of income tax; and in either case
    iii. By the consistent application to the assets concerned of
any generally accepted accounting method, and subject to the
limitations of the Internal Revenue Code of 1954 as amended,
including--
    (a) The straight line method;
    (b) The declining balance method, using a rate not exceeding
twice the rate which would have been used had the annual allowance
been computed under the method described in (a) above;
    (c) The sum of the years-digits method; and
    (d) Any other consistent method productive of an annual
allowance which, when added to all allowances for the period
commencing with the use of the property and including the current
year, does not during the first two-thirds of the useful life of the
property exceed the total of such allowances which would have been
used had such allowances been computed under the method described in
(b) above.
    (4) Where the depreciation method is followed, adequate property
records must be maintained. The period of useful service (service
life) established in each case for usable capital assets must be
determined on a realistic basis which takes into consideration such
factors as type of construction, nature of the equipment used,
technological developments in the particular research area, and the
renewal and replacement policies followed for the individual items
or classes of assets involved. Where the depreciation method is
introduced for application to assets acquired in prior years, the
annual charges therefrom must not exceed the amounts that would have
resulted had the depreciation method been in effect from the date of
acquisition of such assets.

    (5) Depreciation on idle or excess facilities shall not be
allowed except on such facilities as are reasonably necessary for
standby purposes.
    (6) Where an institution elects to go on a depreciation basis
for a particular class of assets, no depreciation, rental or use
charge may be allowed on any such assets that would be viewed as
fully depreciated; provided, however, that reasonable use charges
may be negotiated for any such assets if warranted after taking into
consideration the cost of the facility or item involved, the
estimated useful life remaining at time of negotiation, the actual
replacement policy followed in the light of service lives used for
calculating depreciation, the effect of any increased maintenance
charges or decreased efficiency due to age, and any other factors
pertinent to the utilization of the facility or item for the purpose
contemplated.
    (7) Hospitals which choose a depreciation allowance for assets
purchased prior to 1966 based on a percentage of operating costs in
lieu of normal depreciation for purposes of reimbursement under Pub.
L. 89-97 (Medicare) shall utilize that method for determining
depreciation applicable to organized research.
    The operating costs to be used are the lower of the hospital's
1965 operating costs or the hospital's current year's allowable
costs. The percent to be applied is 5 percent starting with the year
1966-67, with such percentage being uniformity reduced by one-half
percent each succeeding year. The allowance based on operating costs
is in addition to regular depreciation on assets acquired after
1965. However, the combined amount of such allowance on pre-1966
assets and the allowance for actual depreciation on assets acquired
after 1965 may not exceed 6 percent of the hospital's allowable cost
for the current year. After total depreciation has been computed,
allocation methods are used to determine the share attributable to
organized research.
    For purposes of this section, Operating Costs means the total
costs incurred by the hospital in operating the institution, and
includes patient care, research, and other activities. Allowable
Costs means operating costs less unallowable costs as defined in
these principles; by the application of allocation methods to the
total amount of such allowable costs, the share attributable to
Federally-sponsored research is determined.
    A hospital which elects to use this procedure under Pub. L. 89-
97 and subsequently changes to an actual depreciation basis on pre-
1966 assets in accordance with the option afforded under the
Medicare program shall simultaneously change to an actual
depreciation basis for organized research.
    Where the hospital desires to change to actual depreciation but
either has no historical cost records or has incomplete records, the
determination of historical cost could be made through appropriate
means involving expert consultation with the determination being
subject to review and approval by the Department of Health and Human
Services.
    (8) Where the use allowance method is followed, the use
allowance for buildings and improvements 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 of usable
equipment in those cases where the institution maintains current
records with respect to such equipment on hand. Where the
institution's records reflect only the cost (actual or estimated) of
the original complement of equipment, the use allowance will be
computed at an annual rate not exceeding ten percent of such cost.
Original complement for this purpose means the complement of
equipment initially placed in buildings to perform the functions
currently being performed in such buildings; however, where a
permanent change in the function of a building takes place, a
redetermination of the original complement of equipment may be made
at that time to establish a new original complement. In those cases
where no equipment records are maintained, the institution will
justify a reasonable estimate of the acquisition cost of usable
equipment which may be used to compute the use allowance at an
annual rate not exceeding six and two-thirds percent of such
estimate.
    (9) Depreciation and/or use charges should usually be allocated
to research and other activities as an indirect cost.
    j. Employee morale, health, and welfare costs and credits.
    The costs of house publications, health or first-aid benefits,
recreational activities, employees' counseling services, and other
expenses incurred in accordance with the hospital'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 hospital. Income generated from any of
these activities will be credited to the cost thereof unless such
income has been irrevocably set over to employee welfare
organizations.
    k. Entertainment costs.
    Except as pertains to j. above, costs incurred for amusement,
social activities, entertainment, and any items relating thereto,
such as meals, lodging, rentals, transportation, and gratuities are
unallowable.
    l. Equipment and other facilities.
    The cost of equipment or other facilities are allowable on a
direct charge basis where such purchases are approved by the
sponsoring agency concerned or provided for by the terms of the
research agreement.
    m. Fines and penalties.
    Costs resulting from violations of, or failure of the
institution to comply with federal, state and local laws and
regulations are unallowable except when incurred as a result of
compliance with specific provisions of the research agreement, or
instructions in writing from the awarding agency.
    n. Insurance and indemnification.
    (1) Costs of insurance required or approved and maintained
pursuant to the research agreement are allowable.
    (2) Costs of other insurance maintained by the hospital in
connection with the general conduct of its activities are allowable
subject to the following limitations: (i) Types and extent and cost
of coverage must be in accordance with sound institutional practice;
(ii) 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 (iii) 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.
    (3) Contributions to a reserve for an approved 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. Such
contributions are subject to prior approval of the Government.
    (4) Actual losses which could have been covered by permissible
insurance (through an approved self-insurance program or otherwise)
are unallowable unless expressly provided for in the research
agreement, except that costs incurred because of losses not covered
under nominal deductible 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.
    o. Interest, fund raising and investment management costs.
    (1) Costs incurred for interest on borrowed capital or temporary
use of endowment funds, however represented, are unallowable.
    (2) 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 not allowable.
    (3) Costs of investment counsel and staff and similar expenses
incurred solely to enhance income from investments are not
allowable.
    (4) Costs related to the physical custody and control of monies
and securities are allowable.
    p. Labor relations costs.
    Costs incurred in maintaining satisfactory relations between the
hospital and its employees, including costs of labor management
committees, employees' publications, and other related activities
are allowable.
    q. Losses on research agreements or contracts.
    Any excess of costs over income under any agreement or contract
of any nature is unallowable. This includes, but is not limited to,
the hospital's contributed portion by reason of cost-sharing
agreements, under-recoveries through negotiation of flat amounts for
overhead, or legal or administrative limitations.
    r. Maintenance and repair costs.
    (1) Costs necessary for the 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 to be treated as follows:

    i. Normal maintenance and repair costs are allowable;
    ii. Extraordinary maintenance and repair costs are allowable,
provided they are allocated to the periods to which applicable for
purposes of determining research costs.
    (2) Expenditures for plant and equipment, including
rehabilitation thereof, which according to generally accepted
accounting principles as applied under the hospital's established
policy, should be capitalized and subjected to depreciation, are
allowable only on a depreciation basis.
    s. Material costs.
    Costs incurred for purchased materials, supplies and fabricated
parts directly or indirectly related to the research agreement, are
allowable. Purchases made specifically for the research 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 hospital. 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 research 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 research agreement. Where
government donated or furnished material is used in performing the
research agreement, such material will be used without charge.
    t. Memberships, subscriptions and professional activity costs.
    (1) Costs of the hospital's membership in civic, business,
technical and professional organizations are allowable.
    (2) Costs of the hospital's subscriptions to civic, business,
professional and technical periodicals are allowable.
    (3) 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.
    u. Organization costs.
    Expenditures such as incorporation fees, attorneys' fees,
accountants' fees, brokers' fees, fees to promoters and organizers
in connection with (1) organization or reorganization of a hospital,
or (2) raising capital, are unallowable.
    v. Other business expenses.
    Included in this item are such recurring expenses as registry
and transfer charges resulting from changes in ownership of
securities issued by the hospital, cost of shareholders meetings
preparation and publication of reports to shareholders, preparation
and submission of required reports and forms to taxing and other
regulatory bodies, and incidental costs of directors and committee
meetings. The above and similar costs are allowable when allocated
on an equitable basis.
    w. Patient care.
    The cost of routine and ancillary or special services to
research patients is an allowable direct cost of research
agreements.
    (1) Routine services shall include the costs of the regular
room, dietary and nursing services, minor medical and surgical
supplies and the use of equipment and facilities for which a
separate charge is not customarily made.
    (2) Ancillary or special services are the services for which
charges are customarily made in addition to routine services, such
as operating rooms, anesthesia, laboratory, BMR-EKG, etc.
    (3) Patient care, whether expressed as a rate or an amount,
shall be computed in a manner consistent with the procedures used to
determine reimbursable costs under Pub. L. 89-97 (Medicare Program)
as defined under the ``Principles of Reimbursement For Provider
Costs'' published by the Social Security Administration of the
Department of Health and Human Services. The allowability of
specific categories of cost shall be in accordance with those
principles rather than the principles for research contained herein.
In the absence of participation in the Medicare program by a
hospital, all references to the Medicare program in these principles
shall be construed as meaning the Medicaid program.
    i. Once costs have been recognized as allowable, the indirect
costs or general service center's cost shall be allocated (stepped-
down) to special service centers, and all patient and nonpatient
costs centers based upon actual services received or benefiting
these centers.
    ii. After allocation, routine and ancillary costs shall be
apportioned to scatter-bed research patients on the same basis as is
used to apportion costs to Medicare patients, i.e. using either the
departmental method or the combination method, as those methods are
defined by the Social Security Administration; except that final
settlement shall be on a grant-by-grant basis. However, to the
extent that the Social Security Administration has recognized any
other method of cost apportionment, that method generally shall also
be recognized as applicable to the determination of research patient
care costs.
    iii. A cost center must be established on Medicare reimbursement
forms for each discrete-bed unit grant award received by a hospital.
Routine costs should be stepped-down to this line item(s) in the
normal course of stepping-down costs under Medicare/Medicaid
requirements. However, in stepping-down routine costs, consideration
must be given to preventing a step-down of those costs to discrete-
bed unit line items that have already been paid for directly by the
grant, such as bedside nursing costs. Ancillary costs allocable to
research discrete-bed units shall be determined and proposed in
accordance with paragraph w.(3).ii.
    (4) Where federally sponsored research programs provide
specifically for the direct reimbursement of nursing, dietary, and
other services, appropriate adjustment must be made to patient care
costs to preclude duplication and/or misallocation of costs.
    x. Patent costs.
    Costs of preparing disclosures, reports and other documents
required by the research agreement and of searching the art to the
extent necessary to make such invention disclosures are allowable.
In accordance with the clauses of the research 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 paragraph
I.2.jj.)
    y. Pension plan costs.
    Costs of the hospital's pension plan which are incurred in
accordance with the established policies of the institution are
allowable, provided such policies meet the test of reasonableness
and the methods of cost allocation are not discriminatory, and
provided appropriate adjustments are made for credits or gains
arising out of normal and abnormal employee turnover or any other
contingencies that can result in forfeitures by employees which
inure to the benefit of the hospital.
    z. Plan security costs.
    Necessary expenses incurred to comply with government security
requirements including wages, uniforms and equipment of personnel
engaged in plant protection are allowable.
    aa. Pre-research agreement costs.
    Costs incurred prior to the effective date of the research
agreement, whether or not they would have been allowable thereunder
if incurred after such date, are unallowable unless specifically set
forth and identified in the research agreement.
    bb. Professional services costs.
    (1) Costs of professional services rendered by the members of a
particular profession who are not employees of the hospital are
allowable subject to (2) and (3) below when reasonable in relation
to the services rendered and when not contingent upon recovery of
the costs from the Government. Retainer fees to be allowable must be
reasonably supported by evidence of services rendered.
    (2) Factors to be considered in determining the allowability of
costs in a particular case include (i) the past pattern of such
costs, particularly in the years prior to the award of government
research agreements on the institution's total activity; (ii) the
nature and scope of managerial services expected of the
institution's own organizations; and (iii) whether the proportion of
government work to the hospital'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 government
research agreements.
    (3) Costs of legal, accounting and consulting services, and
related costs incurred in connection with organization and
reorganization or the prosecution of claims against the Government
are unallowable. 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
research agreement.
    cc. Profits and losses on disposition of plant equipment, or
other assets.
    Profits or losses of any nature arising from the sale or
exchange of plant, equipment, or

other capital assets, including sales or exchange of either short-
or long-term investments, shall be excluded in computing research
agreement costs.
    dd. Proposal costs.
    Proposal costs are the costs of preparing bids or proposals on
potential government and non-government research agreements or
projects, including the development of technical data and cost 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 in the current period to the government research
agreement. However, the institution's established practices may be
to treat proposal costs by some other recognized method. Regardless
of the methods used, the results obtained may be accepted only if
found to be reasonable and equitable.
    ee. Public information services costs.
    Costs of news releases pertaining to specific research or
scientific accomplishment are unallowable unless specifically
authorized by the sponsoring agency.
    ff. Rearrangement and alteration costs.
    Costs incurred for ordinary or normal rearrangement and
alteration of facilities are allowable. Special rearrangement and
alteration costs incurred specifically for a project are allowable
only as a direct charge when such work has been approved in advance
by the sponsoring agency concerned.
    gg. 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 government research
agreement work, fair wear and tear excepted, are allowable.
    hh. Recruiting costs.
    (1) Subject to (2), (3), and (4) 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 an institution uses employment agencies, costs not in
excess of standard commercial rates for such services are allowable.
    (2) 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.
    (3) 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.
    (4) 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 relocations costs as were
charged to the Government.
    ii. Rental costs (including sale and lease-back of facilities).
    (1) Rental costs of land, building, and equipment and other
personal property are allowable if the rates are reasonable in light
of such factors as rental costs of comparable facilities and market
conditions in the area, the type, life expectancy, condition, and
value of the facilities leased, options available, and other
provisions of the rental agreement. Application of these factors, in
situations where rentals are extensively used, may involve among
other considerations comparison of rental costs with the amount
which the hospital would have received had it owned the facilities.
    (2) Charges in the nature of rent between organizations having a
legal or other affiliation or arrangement such as hospitals, medical
schools, foundations, etc., are allowable to the extent such charges
do not exceed the normal costs of ownership such as depreciation,
taxes, insurance, and maintenance, provided that no part of such
costs shall duplicate any other allowed costs.
    (3) Unless otherwise specifically provided in the agreement,
rental costs specified in sale and lease-back agreements incurred by
hospitals through selling plant facilities to investment
organizations such as insurance companies or to private investors,
and concurrently leasing back the same facilities are allowable only
to the extent that such rentals do not exceed the amount which the
hospital would have received had it retained legal title to the
facilities.
    jj. 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 research 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.
    kk. Severance pay.
    (1) Severance pay is compensation in addition to regular
salaries and wages which is paid by a hospital 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.
    (2) 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.
    (3) 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.
    ll. Specialized service facilities operated by a hospital.
    (1) The costs of institutional services involving the use of
highly complex and specialized facilities such as electronic
computers and reactors are allowable provided the charges therefor
meet the conditions of (2) or (3) below, and otherwise take into
account any items of income or federal financing that qualify as
applicable credits under paragraph C.5.
    (2) The costs of such hospital services normally will be charged
directly to applicable research agreements based on actual usage or
occupancy of the facilities at rates that (i) are designed to
recover only actual costs of providing such services, and (ii) are
applied on a nondiscriminatory basis as between organized research
and other work of the hospital including commercial or accommodation
sales and usage by the hospital for internal purposes. This would
include use of such facilities as radiology, laboratories,
maintenance men used for a special purpose, medical art,
photography, etc.
    (3) In the absence of an acceptable arrangement for direct
costing as provided in (2) above, the costs incurred for such
institutional services may be assigned to research agreements as
indirect costs, provided the methods used achieve substantially the
same results. Such arrangements should be worked out in coordination
with all government users of the facilities in order to assure
equitable distribution of the indirect costs.
    mm. Special administrative costs.
    Costs incurred for general public relations activities,
catalogs, alumni activities, and similar services are unallowable.
    nn. Staff and/or employee benefits.
    (1) Staff and/or employee benefits in the form of regular
compensation paid to employees during periods of authorized absences
from the job such as for annual leave, sick leave, military leave
and the like are allowable provided such costs are absorbed by all
hospital activities including organized research in proportion to
the relative amount of time or effort actually devoted to each.
    (2) Staff benefits in the form of employer contributions or
expenses for Social Security taxes, employee insurance, Workmen's
Compensation insurance, the Pension Plan (see paragraph I.2.y.),
hospital costs or remission of hospital charges to the extent of
costs for individual employees or their families, and the like are
allowable provided such benefits are granted in accordance with

established hospital policies, and provided such contributions and
other expenses whether treated as indirect costs or an increment of
direct labor costs are distributed to particular research agreements
and other activities in a manner consistent with the pattern of
benefits accruing to the individuals or groups of employees whose
salaries and wages are chargeable to such research agreements and
other activities.
    oo. Taxes.
    (1) In general, taxes which the hospital is required to pay and
which are paid or accrued in accordance with generally accepted
accounting principles, and payments made to local governments in
lieu of taxes which are commensurate with the local government
services received are allowable except for (i) taxes from which
exemptions are available to the hospital directly or which are
available to the hospital based on an exemption afforded the
Government and in the latter case when the sponsoring agency makes
available the necessary exemption certificates, (ii) special
assessments on land which represent capital improvements, and (iii)
Federal Income Taxes.
    (2) Any refund of taxes, interest, or penalties, and any payment
to the hospital of interest thereon attributable to taxes, interest
or penalties, which were allowed as research agreement costs will be
credited or paid to the Government in the manner directed by the
Government provided any interest actually paid or credited to a
hospital 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 hospital had been
reimbursed by the Government for the taxes, interest, and penalties.
    pp. Transportation costs.
    Costs incurred for inbound 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 material 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 research agreement, should be
treated as a direct cost.
    qq. Travel costs.
    (1) 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 hospital. 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, and results in charges consistent with
those normally allowed by the institution in its regular operations.
    (2) Travel costs are allowable subject to (3) and (4) below when
they are directly attributable to specific work under a research
agreement or when they are incurred in the normal course of
administration of the hospital or a department or research program
thereof.
    (3) The difference in cost between first class air
accommodations and less than first class air accommodations is
unallowable except when less than first class air accommodations are
not reasonably available to meet necessary mission requirements such
as where less than first class accommodations would (i) require
circuitous routing, (ii) require travel during unreasonable hours,
(iii) greatly increase the duration of the flight, (iv) result in
additional costs which would offset the transportation savings, or
(v) offer accommodations which are not reasonably adequate for the
medical needs of the traveler.
    (4) Costs of personnel movements of a special or mass nature are
allowable only when authorized or approved in writing by the
sponsoring agency or its authorized representative.
    rr. Termination costs applicable to contracts.
    (1) Contract terminations generally give rise to the incurrence
of costs or to the need for special treatment of costs which would
not have arisen had the contract not been terminated. Items peculiar
to termination are set forth below. They are to be used in
conjunction with all other provisions of these principles in the
case of contract termination.
    (2) The cost of common items of material reasonably usable on
the hospital's other work will not be allowable unless the hospital
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 hospital's plans for current scheduled work or
activities including other research agreements. Contemporaneous
purchases of common items by the hospital will be regarded as
evidence that such items are reasonably usable on the hospital's
other work. Any acceptance of common items as allowable to the
terminated portion of the contract 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 requirement of other
work.
    (3) If in a particular case, despite all reasonable efforts by
the hospital, certain costs cannot be discontinued immediately after
the effective date of termination, such costs are generally
allowable within the limitations set forth in these principles,
except that any such costs continuing after termination due to the
negligent or willful failure of the hospital to discontinue such
costs will be considered unacceptable.
    (4) Loss of useful value of special tooling and special
machinery and equipment is generally allowable, provided (i) such
special tooling, machinery or equipment is not reasonably capable of
use in the other work of the hospital; (ii) the interest of the
Government is protected by transfer of title or by other means
deemed appropriate by the contracting officer; and (iii) the loss of
useful value as to any one terminated contract 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 contract
bears to the entire terminated contract and other government
contracts for which the special tooling, special machinery or
equipment was acquired.
    (5) Rental costs under unexpired leases are generally allowable
where clearly shown to have been reasonably necessary for the
performance of the terminated contract, less the residual value of
such leases, if (i) the amount of such rental claimed does not
exceed the reasonable use value of the property leased for the
period of the contract and such further period as may be reasonable;
and (ii) the hospital 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 contract and of reasonable restoration required
by the provisions of the lease.
    (6) Settlement expenses including the following are generally
allowable: (i) Accounting, legal, clerical, and similar costs
reasonably necessary for the preparation and presentation to
contracting officers of settlement claims and supporting data with
respect to the terminated portion of the contract and the
termination and settlement of subcontracts; and (ii) reasonable
costs for the storage, transportation, protection, and disposition
of property provided by the Government or acquired or produced by
the institution for the contract.
    (7) Subcontractor claims including the allocable portion of
claims which are common to the contract and to other work of the
contractor are generally allowable.
    ss. Voluntary services.
    The value of voluntary services provided by sisters or other
members of religious orders is allowable provided that amounts do
not exceed that paid other employees for similar work. Such amounts
must be identifiable in the records of the hospital as a legal
obligation of the hospital. This may be reflected by an agreement
between the religious order and the hospital supported by evidence
of payments to the order.

Appendix X to Part 75--Data Collection Form (SF-SAC)

    The Data Collection Form SF-SAC is available on the FAC Web site
https://harvester.census.gov/facweb/Default.aspx.

Appendix XI to Part 75--Compliance Supplement

    The compliance supplement is available on the OMB Web site:
(http://www.whitehouse.gov/omb/circulars/)

PART 92 [REMOVED AND RESERVED]

0
4. Remove and reserve 45 CFR part 92.

Ellen Murray,
Assistant Secretary for Financial Resources.

Department of Agriculture

    For the reasons stated in the common preamble, under the authority
of 5

U.S.C. 301, 7 CFR 2.28(a)(13)(iii), and the authorities listed below,
USDA adds Parts 400, 415, 416, 418 and 422 to Title 2 of the CFR and
removes Parts 3015, 3016, 3018, 3019, 3022 and 3052 from Title 7 of the
CFR as follows:

TITLE 2--GRANTS AND AGREEMENTS

CHAPTER IV--DEPARTMENT OF AGRICULTURE

0
1. Title 2 of the Code of Federal Regulations is amended by adding Part
400 to read as follows:

PART 400--UNIFORM ADMINISTRATIVE REQUIREMENTS, COST PRINCIPLES, AND
AUDIT REQUIREMENTS FOR FEDERAL AWARDS

400.1 What does this part do?
400.2 Conflict of interest.

    Authority: 31 U.S.C. 503.

PART 400--UNIFORM ADMINISTRATIVE REQUIREMENTS, COST PRINCIPLES, AND
AUDIT REQUIREMENTS FOR FEDERAL AWARDS

Sec.  400.1  What does this part do?

    This part adopts the OMB guidance in subparts A through F of 2 CFR
part 200, as supplemented by this part, as USDA policies and procedures
for uniform administrative requirements, cost principles, and audit
requirements for Federal awards. It thereby gives regulatory effect for
the USDA to the OMB guidance, as supplemented by this part.

Sec.  400.2  Conflict of interest.

    (a) Each USDA awarding agency must establish conflict of interest
policies for its Federal awards.
    (b) Non-Federal entities must disclose in writing any potential
conflicts of interest to the USDA awarding agency or pass-through
entity.
    (1) The non-Federal entity must maintain written standards of
conduct covering conflicts of interest and governing the performance of
its employees in the selection, award and administration of Federal
awards. No employee, officer or agent may participate in the selection,
award, or administration of a Federal award if he or she has a real or
apparent conflict of interest. Such a conflict of interest would arise
when the employee, officer, or agent, any member of his or her
immediate family, his or her partner, or an organization which employs
or is about to employ any of the parties indicated herein, has a
financial or other interest in or a tangible personal benefit from a
non-Federal entity considered for a Federal award. The non-Federal
entity may set standards for situations in which the financial interest
is not substantial or the gift is an unsolicited item of nominal value.
The standards of conduct must provide for disciplinary actions to be
applied for violations of such standards by officers, employees, or
agents of the non-Federal entity.
    (2) If the non-Federal entity has a parent, affiliate, or
subsidiary organization that is not a state, local government, or
Indian tribe, the non-Federal entity must also maintain written
standards of conduct covering organizational conflicts of interest.
Organizational conflicts of interest means that because of the
relationships with a parent company, affiliate, or subsidiary
organization, is unable or appears to be unable to be impartial in
conducting a Federal award action involving a related organization.

0
2. Title 2 of the Code of Federal Regulations is amended by adding Part
415 to read as follows:

PART 415--GENERAL PROGRAM ADMINISTRATIVE REGULATIONS

Subpart A--Application for Federal Assistance
Sec.
415.1 Competition in the awarding of discretionary grants and
cooperative agreements.
Subpart B--Miscellaneous
415.2 Acknowledgement of Support on Publications and Audiovisuals.
Subpart C--Intergovernmental Review of Department of Agriculture
Programs and Activities
415.3 Purpose.
415.4 Definitions.
415.5 Applicability.

415.6  Secretary's general responsibilities.

415.7 Federal interagency coordination.
415.8 State selection of programs and activities.
415.9 Communication with State and local elected officials.
415.10 State comments on proposed Federal financial assistance and
direct Federal development.
415.11 Processing comments.
415.12 Accommodation of intergovernmental concerns.
415.13 Interstate situations.
415.14 Simplification, consolidation, or substitution of State
plans.
415.15 Waivers.

    Authority:  5 U.S.C. 301.

Subpart A--Application for Federal Assistance

Sec.  415.1  Competition in the awarding of discretionary grants and
cooperative agreements.

    (a) Standards for competition. Except as provided in paragraph (d)
of this section, awarding agencies shall enter into discretionary
grants and cooperative agreements only after competition. An awarding
agency's competitive award process shall adhere to the following
standards:
    (1) Potential applicants must be invited to submit proposals
through publications such as the Federal Register, OMB-designated
governmentwide Web site as described in 2 CFR 200.203, professional
trade journals, agency or program handbooks, the Catalog of Federal
Domestic Assistance, or any other appropriate means of solicitation. In
so doing, awarding agencies should consider the broadest dissemination
of project solicitations in order to reach the highest number of
potential applicants.
    (2) Proposals are to be evaluated objectively by independent
reviewers in accordance with written criteria set forth by the awarding
agency. Reviewers should make written comments, as appropriate, on each
application. Independent reviewers may be from the private sector,
another agency, or within the awarding agency, as long as they do not
include anyone who has approval authority for the applications being
reviewed or anyone who might appear to have a conflict of interest in
the role of reviewer of applications. A conflict of interest might
arise when the reviewer or the reviewer's immediate family members have
been associated with the applicant or applicant organization within the
past two years as an owner, partner, officer, director, employee, or
consultant; has any financial interest in the applicant or applicant
organization; or is negotiating for, or has any arrangement, concerning
prospective employment.
    (3) An unsolicited application, which is not unique and innovative,
shall be competed under the project solicitation it comes closest to
fitting. Awarding agency officials will determine the solicitation
under which the application is to be evaluated. When the awarding
agency official decides that the unsolicited application does not fall
under a recent, current, or planned solicitation, a noncompetitive
award may be made, if appropriate to do so under the criteria of this
section. Otherwise, the application should be returned to the
applicant.

    (b) Project solicitations. A project solicitation by the awarding
agency shall include or reference the following, as appropriate:
    (1) A description of the eligible activities which the awarding
agency proposes to support and the program priorities;
    (2) Eligible applicants;
    (3) The dates and amounts of funds expected to be available for
awards;
    (4) Evaluation criteria and weights, if appropriate, assigned to
each;
    (5) Methods for evaluating and ranking applications;
    (6) Name and address where proposals should be mailed or emailed
and submission deadline(s);
    (7) Any required forms and how to obtain them;
    (8) Applicable cost principles and administrative requirements;
    (9) Type of funding instrument intended to be used (grant or
cooperative agreement); and
    (10) The Catalog of Federal Domestic Assistance number and title.
    (c) Approval of applications. The final decision to award is at the
discretion of the awarding/approving official in each agency. The
awarding/approving official shall consider the ranking, comments, and
recommendations from the independent review group, and any other
pertinent information before deciding which applications to approve and
their order of approval. Any appeals by applicants regarding the award
decision shall be handled by the awarding agency using existing agency
appeal procedures or good administrative practice and sound business
judgment.
    (d) Exceptions. The awarding/approving official may make a
determination in writing that competition is not deemed appropriate for
a particular transaction. Such determination shall be limited to
transactions where it can be adequately justified that a noncompetitive
award is in the best interest of the Government and necessary to the
accomplishment of the goals of the program. Reasons for considering
noncompetitive awards may include, but are not necessarily limited to,
the following:
    (1) Nonmonetary awards of property or services;
    (2) Awards of less than $75,000;
    (3) Awards to fund continuing work already started under a previous
award;
    (4) Awards which cannot be delayed due to an emergency or a
substantial danger to health or safety;
    (5) Awards when it is impracticable to secure competition; or
    (6) Awards to fund unique and innovative unsolicited applications.

Subpart B--Miscellaneous

Sec.  415.2  Acknowledgement of USDA Support on Publications and
Audiovisuals.

    (a) Definitions.
    (1) ``Audiovisual'' means a product containing visual imagery or
sound or both. Examples of audiovisuals are motion pictures, live or
prerecorded radio or television programs, slide shows, filmstrips,
audio recordings, and multimedia presentations.
    (2) ``Production of an audiovisual'' means any of the steps that
lead to a finished audiovisual, including design, layout, script-
writing, filming, editing, fabrication, sound recording or taping. The
term does not include the placing of captions for the hearing impaired
on films or videotapes not originally produced for use with the hearing
impaired.
    (3) ``Publication'' means a published book, periodical, pamphlet,
brochure, flier, or similar item. It does not include any audiovisuals.
    (b) Publications. Recipients shall have an acknowledgement of USDA
awarding agency support placed on any publications written or published
with grant support and, if feasible, on any publication reporting the
results of, or describing, a grant-supported activity.
    (c) Audiovisuals. Recipients shall have an acknowledgement of USDA
awarding agency support placed on any audiovisual which is produced
with grant support and which has a direct production cost to the
recipient of over $5,000. Unless the other provisions of the grant
award make it apply, this requirement does not apply to:
    (1) Audiovisuals produced as research instruments or for
documenting experimentation or findings and not intended for
presentation or distribution to the general public.
    (2) [Reserved]
    (d) Waivers. USDA awarding agencies may waive any requirement of
this section.

Subpart C--Intergovernmental Review of Department of Agriculture
Programs and Activities

Sec.  415.3  Purpose.

    (a) The regulations in this part implement Executive Order 12372,
``Intergovernmental Review of Federal Programs'', issued July 14, 1982,
and amended on April 8, 1983. These regulations also implement
applicable provisions of section 401 of the Intergovernmental
Cooperation Act of 1968 and section 204 of the Demonstration Cities and
Metropolitan Development Act of 1966.
    (b) These regulations are intended to foster an intergovernmental
partnership and a strengthened Federalism by relying on State processes
and on State, areawide, regional and local coordination for review of
proposed Federal financial assistance and direct Federal development.
    (c) The regulations are intended to aid the internal management of
the Department, and are not intended to create any right or benefit
enforceable at law by a party against the Department or its officers.

Sec.  415.4  Definitions.

    As used in this part, the following definitions apply:
    Department means the U.S. Department of Agriculture.
    Order means Executive Order 12372, issued July 14, 1982, and
amended April 8, 1983, and titled Intergovernmental Review of Federal
Programs.
    Secretary means the Secretary of the U.S. Department of Agriculture
or an official or employee of the Department acting for the Secretary
under a delegation of authority.
    State means any of the 50 states, the District of Columbia, the
Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana
Islands, Guam, American Samoa, and the U.S. Virgin Islands.

Sec.  415.5  Applicability.

    The Secretary publishes in the Federal Register a list of the
Department's programs and activities that are subject to these
regulations and identifies which of these are subject to the
requirements of section 204 of the Demonstration Cities and
Metropolitan Development Act.

Sec.  415.6  Secretary's general responsibilities.

    (a) The Secretary provides opportunities for consultation by
elected officials of those State and local governments that would
provide the non-Federal funds for, or that would be directly affected
by, proposed Federal financial assistance from, or direct Federal
development by, the Department.
    (b) If a State adopts a process under the Order to review and
coordinate proposed Federal financial assistance and direct Federal
development, the Secretary, to the extent permitted by law:
    (1) Uses the State process to determine official views of State and
local elected officials;
    (2) Communicates with State and local elected officials as early in
a program planning cycle as is reasonably feasible to explain specific
plans and actions;

    (3) Makes efforts to accommodate State and local elected officials'
concerns with proposed Federal financial assistance and direct Federal
development that are communicated through the State process;
    (4) Allows the States to simplify and consolidate existing
Federally required State plan submissions;
    (5) Where State planning and budgeting systems are sufficient and
where permitted by law, encourages the substitution of State plans for
Federally required State plans;
    (6) Seeks the coordination of views of affected State and local
elected officials in one State with those of another State when
proposed Federal financial assistance or direct Federal development has
an impact on interstate metropolitan urban centers or other interstate
areas; and
    (7) Supports State and local governments by discouraging the
reauthorization or creation of any planning organization which is
Federally-funded, which has a limited purpose, and which is not
adequately representative of, or accountable to, State or local elected
officials.

Sec.  415.7  Federal interagency coordination.

    The Secretary, to the extent practicable, consults with and seeks
advice from all other substantially affected Federal departments and
agencies in an effort to assure full coordination between such agencies
and the Department regarding programs and activities covered under
these regulations.

Sec.  415.8  State selection of programs and activities.

    (a) A State may select any program or activity published in the
Federal Register in accordance with Sec.  415.5 for intergovernmental
review under these regulations. Each State, before selecting programs
and activities, shall consult with local elected officials.
    (b) Each State that adopts a process shall notify the secretary of
the Department's programs and activities selected for that process.
    (c) A State may notify the Secretary of changes in its selections
at any time. For each change, the State shall submit to the Secretary
an assurance that the State has consulted with elected local officials
regarding the change. The Department may establish deadlines by which
States are required to inform the Secretary of changes in their program
selections.
    (d) The Secretary uses a State's process as soon as feasible,
depending on individual programs and activities, after the Secretary is
notified of its selections.

Sec.  415.9  Communication with State and local elected officials.

    (a) The Secretary provides notice to directly affected State,
areawide, regional, and local entities in a State of proposed Federal
financial assistance or direct Federal development if:
    (1) The State has not adopted a process under the Order; or
    (2) The assistance or development involves a program or an activity
that is not covered under the State process.
    (b) This notice may be made by publication in the Federal Register
or other appropriate means, which the Department in its discretion
deems appropriate.
    (c) In order to facilitate communication with State and local
officials the Secretary has established an office within the Department
to receive all communications pertinent to this Order. All
communications should be sent to the Office of the Chief Financial
Officer, Room 143-W, 1400 Independence Avenue SW., Washington, DC
20250, Attention: E.O. 12372.

Sec.  415.10  State comments on proposed Federal financial assistance
and direct Federal development.

    (a) Except in unusual circumstances, the Secretary gives State
processes or directly affected State, areawide, regional, and local
officials and entities:
    (1) At least 30 days from the date established by the Secretary to
comment on proposed Federal financial assistance in the form of
noncompeting continuation awards; and
    (2) At least 60 days from the date established by the Secretary to
comment on proposed direct Federal development or Federal financial
assistance other than noncompeting continuation awards.
    (b) This section also applies to comments in cases in which the
review, coordination and communication with the Department have been
delegated.
    (c) Applicants for programs and activities subject to section 204
of the Demonstration Cities and Metropolitan Development Act shall
allow areawide agencies a 60-day opportunity for review and comment.

Sec.  415.11  Processing comments.

    (a) The Secretary follows the procedures in Sec.  415.12 if:
    (1) A State office or official is designated to act as a single
point of contact between a State process and all Federal agencies; and
    (2) That office or official transmits a State process
recommendation for a program selected under Sec.  415.8.
    (b)(1) The single point of contact is not obligated to transmit
comments from State, areawide, regional or local officials and entities
where there is no State process recommendation.
    (2) If a State process recommendation is transmitted by a single
point of contact, all comments from State, areawide, regional and local
officials and entities that differ from it must also be transmitted.
    (c) If a State has not established a process, or is unable to
submit a State process recommendation, State, areawide, regional and
local officials and entities may submit comments either to the
applicant or to the Department.
    (d) If a program or activity is not selected by a State process,
State, areawide, regional and local officials and entities may submit
comments either to the applicant or to the Department. In addition, if
a State process recommendation for a non-selected program or activity
is transmitted to the Department by the single point of contact, the
Secretary follows the procedures of Sec.  415.12.
    (e) The Secretary considers comments which do not constitute a
State process recommendation submitted under these regulations and for
which the Secretary is not required to apply the procedures of Sec.
415.12, when such comments are provided by a single point of contact by
the applicant, or directly to the Department by a commenting party.

Sec.  415.12  Accommodation of intergovernmental concerns.

    (a) If a State process provides a State process recommendation to
the Department through its single point of contact, the Secretary
either--
    (1) Accepts the recommendations;
    (2) Reaches a mutually agreeable solution with the State process;
or
    (3) Provides the single point of contact with a written explanation
of the decision, as the Secretary in his or her discretion deems
appropriate. The Secretary may also supplement the written explanation
by also providing the explanation to the single point of contact by
telephone, other telecommunication, or other means.
    (b) In any explanation under paragraph (a)(3) of this section, the
Secretary informs the single point of contact that:
    (1) The Department will not implement its decision for at least ten
days after the single point of contact receives the explanation; or
    (2) The Secretary has reviewed the decision and determined that,
because of unusual circumstances, the waiting period of at least ten
days is not feasible.
    (c) For purposes of computing the waiting period under paragraph
(b)(1) of

this section, a single point of contact is presumed to have received
written notification five days after the date of mailing of such
notification.

Sec.  415.13  Interstate situations.

    (a) The Secretary is responsible for:
    (1) Identifying proposed Federal financial assistance and direct
Federal development that have an impact on interstate areas;
    (2) Notifying appropriate officials in States which have adopted a
process and which selected the Department's program or activity;
    (3) Making efforts to identify and notify the affected State,
areawide, regional and local officials and entities in those States
that have not adopted a process under the Order or do not select the
Department's program or activity; and
    (4) Responding, pursuant to Sec.  415.12, if the Secretary receives
a recommendation from a designated areawide agency transmitted by a
single point of contact, in cases in which the review, coordination,
and communication with the Department have been delegated.
    (b) The Secretary uses the procedures in Sec.  415.12 if a State
process provides a State process recommendation to the Department
through a single point of contact.

Sec.  415.14  Simplification, consolidation, or substitution of State
plans.

    (a) As used in this section:
    (1) Simplify means that a State may develop its own format, choose
its own submission date, and select the planning period for a State
plan.
    (2) Consolidate means that a State may meet statutory and
regulatory requirements by combining two or more plans into one
document and that the State can select the format, submission date, and
the planning period for the consolidated plan.
    (3) Substitute means that a State may use a plan or other document
that it has developed for its own purposes to meet Federal
requirements.
    (b) If not inconsistent with law, a State may decide to try to
simplify, consolidate, or substitute Federally required State plans
without prior approval by the Secretary.
    (c) The Secretary reviews each State plan a State has simplified,
consolidated or substituted and accepts the plan only if its contents
meet Federal requirements.

Sec.  415.15  Waivers.

    In an emergency, the Secretary may waive any provision in Subpart
C--Intergovernmental Review of Department of Agriculture Programs and
Activities, 2 CFR 415.3 to 415.14.

0
3. Title 2 of the Code of Federal Regulations is amended by adding Part
416 to read as follows:

PART 416--GENERAL PROGRAM ADMINISTRATIVE REGULATIONS FOR GRANTS AND
COOPERATIVE AGREEMENTS TO STATE AND LOCAL GOVERNMENTS

    Authority:  5 U.S.C. 301.

Sec.  416.1  Special Procurement Provisions.

    (a) In order to ensure objective contractor performance and
eliminate unfair competitive advantage, a prospective contractor that
develops or drafts specifications, requirements, statements of work,
invitations for bids, request for proposals, contract term and
conditions or other documents for use by a State in conducting a
procurement under the USDA entitlement programs specified in 2 CFR
200.101(e)(4) through (6) shall be excluded from competing for such
procurements. Such prospective contractors are ineligible for contract
awards resulting from such procurements regardless of the procurement
method used. However, prospective contractors may provide States with
specification information related to a State procurement under the USDA
entitlement programs specified in 2 CFR 200.101(e)(4) through (6) and
still compete for the procurement if the State, and not the prospective
contractor, develops or drafts the specifications, requirements,
statements of work, invitations for bid, and/or requests for proposals
used to conduct the procurement.
    (b) Procurements by States under USDA entitlement programs
specified in 2 CFR 200.101(e)(4) through (6) shall be conducted in a
manner that prohibits the use of statutorily or administratively
imposed in-State or local geographic preferences except as provided for
in 2 CFR 200.319(b).

0
4. Title 2 of the Code of Federal Regulations is amended by adding part
418 to read as follows:

PART 418--NEW RESTRICTIONS ON LOBBYING

Sec.
Subpart A--General
418.100 Conditions on use of funds.
418.105 Definitions.
418.110 Certification and disclosure.
Subpart B--Activities by Own Employees
418.200 Agency and legislative liaison.
418.205 Professional and technical services.
418.210 Reporting.
Subpart C--Activities by Other Than Own Employees
418.300 Professional and technical services.
Subpart D--Penalties and Enforcement
418.400 Penalties.
418.405 Penalty procedures.
418.410 Enforcement.
Subpart E--Exemptions
418.500 Secretary of Defense.
Subpart F--Agency Reports
418.600 Semi-annual compilation.
418.605 Inspector General report.
Appendix A to Part 418--Certification Regarding Lobbying
Appendix B to Part 418--Disclosure Form to Report Lobbying

    Authority: 31 U.S.C. 1352; 5 U.S.C. 301.

Subpart A--General

Sec.  418.100  Conditions on use of funds.

    (a) No appropriated funds may be expended by the recipient of a
Federal contract, grant, loan, or cooperative agreement to pay any
person for influencing or attempting to influence an officer or
employee of any agency, a Member of Congress, an officer or employee of
Congress, or an employee of a Member of Congress in connection with any
of the following covered Federal actions: the awarding of any Federal
contract, the making of any Federal grant, the making of any Federal
loan, the entering into of any cooperative agreement, and the
extension, continuation, renewal, amendment, or modification of any
Federal contract, grant, loan, or cooperative agreement.
    (b) Each person who requests or receives from an agency a Federal
contract, grant, loan, or cooperative agreement shall file with that
agency a certification, set forth in Appendix A, that the person has
not made, and will not make, any payment prohibited by paragraph (a) of
this section.
    (c) Each person who requests or receives from an agency a Federal
contract, grant, loan, or a cooperative agreement shall file with that
agency a disclosure form, set forth in Appendix B, if such person has
made or has agreed to make any payment using nonappropriated funds (to
include profits from any covered Federal action), which would be
prohibited under paragraph (a) of this section if paid for with
appropriated funds.
    (d) Each person who requests or receives from an agency a
commitment providing for the United States to insure or guarantee a
loan shall file with that agency a statement, set forth in Appendix A,
whether that person has made or has agreed to make any

payment to influence or attempt to influence an officer or employee of
any agency, a Member of Congress, an officer or employee of Congress,
or an employee of a Member of Congress in connection with that loan
insurance or guarantee.
    (e) Each person who requests or receives from an agency a
commitment providing for the United States to insure or guarantee a
loan shall file with that agency a disclosure form, set forth in
Appendix B, if that person has made or has agreed to make any payment
to influence or attempt to influence an officer or employee of any
agency, a Member of Congress, an officer or employee of Congress, or an
employee of a Member of Congress in connection with that loan insurance
or guarantee.

Sec.  418.105  Definitions.

    For purposes of this part:
    (a) Agency, as defined in 5 U.S.C. 552(f), includes Federal
executive departments and agencies as well as independent regulatory
commissions and Government corporations, as defined in 31 U.S.C.
9101(1).
    (b) Covered Federal action. (1) Covered Federal action means any of
the following Federal actions:
    (i) The awarding of any Federal contract;
    (ii) The making of any Federal grant;
    (iii) The making of any Federal loan;
    (iv) The entering into of any cooperative agreement; and,
    (v) The extension, continuation, renewal, amendment, or
modification of any Federal contract, grant, loan, or cooperative
agreement.
    (2) Covered Federal action does not include receiving from an
agency a commitment providing for the United States to insure or
guarantee a loan. Loan guarantees and loan insurance are addressed
independently within this part.
    (c) Federal contract means an acquisition contract awarded by an
agency, including those subject to the Federal Acquisition Regulation
(FAR), and any other acquisition contract for real or personal property
or services not subject to the FAR.
    (d) Federal cooperative agreement means a cooperative agreement
entered into by an agency.
    (e) Federal grant means an award of financial assistance in the
form of money, or property in lieu of money, by the Federal Government
or a direct appropriation made by law to any person. The term does not
include technical assistance which provides services instead of money,
or other assistance in the form of revenue sharing, loans, loan
guarantees, loan insurance, interest subsidies, insurance, or direct
United States cash assistance to an individual.
    (f) Federal loan means a loan made by an agency. The term does not
include loan guarantee or loan insurance.
    (g) Indian tribe and tribal organization have the meaning provided
in section 4 of the Indian Self-Determination and Education Assistance
Act (25 U.S.C. 450B). Alaskan Natives are included under the
definitions of Indian tribes in that Act.
    (h) Influencing or attempting to influence means making, with the
intent to influence, any communication to or appearance before an
officer or employee or any agency, a Member of Congress, an officer or
employee of Congress, or an employee of a Member of Congress in
connection with any covered Federal action.
    (i) Loan guarantee and loan insurance means an agency's guarantee
or insurance of a loan made by a person.
    (j) Local government means a unit of government in a State and, if
chartered, established, or otherwise recognized by a State for the
performance of a governmental duty, including a local public authority,
a special district, an intrastate district, a council of governments, a
sponsor group representative organization, and any other
instrumentality of a local government.
    (k) Officer or employee of an agency includes the following
individuals who are employed by an agency:
    (1) An individual who is appointed to a position in the Government
under title 5, U.S. Code, including a position under a temporary
appointment;
    (2) A member of the uniformed services as defined in section
101(3), title 37, U.S. Code;
    (3) A special Government employee as defined in section 202, title
18, U.S. Code; and,
    (4) An individual who is a member of a Federal advisory committee,
as defined by the Federal Advisory Committee Act, title 5, U.S. Code
appendix 2.
    (l) Person means an individual, corporation, company, association,
authority, firm, partnership, society, State, and local government,
regardless of whether such entity is operated for profit or not for
profit. This term excludes an Indian tribe, tribal organization, or any
other Indian organization with respect to expenditures specifically
permitted by other Federal law.
    (m) Reasonable compensation means, with respect to a regularly
employed officer or employee of any person, compensation that is
consistent with the normal compensation for such officer or employee
for work that is not furnished to, not funded by, or not furnished in
cooperation with the Federal Government.
    (n) Reasonable payment means, with respect to professional and
other technical services, a payment in an amount that is consistent
with the amount normally paid for such services in the private sector.
    (o) Recipient includes all contractors, subcontractors at any tier,
and subgrantees at any tier of the recipient of funds received in
connection with a Federal contract, grant, loan, or cooperative
agreement. The term excludes an Indian tribe, tribal organization, or
any other Indian organization with respect to expenditures specifically
permitted by other Federal law.
    (p) Regularly employed means, with respect to an officer or
employee of a person requesting or receiving a Federal contract, grant,
loan, or cooperative agreement or a commitment providing for the United
States to insure or guarantee a loan, an officer or employee who is
employed by such person for at least 130 working days within one year
immediately preceding the date of the submission that initiates agency
consideration of such person for receipt of such contract, grant, loan,
cooperative agreement, loan insurance commitment, or loan guarantee
commitment. An officer or employee who is employed by such person for
less than 130 working days within one year immediately preceding the
date of the submission that initiates agency consideration of such
person shall be considered to be regularly employed as soon as he or
she is employed by such person for 130 working days.
    (q) State means a State of the United States, the District of
Columbia, the Commonwealth of Puerto Rico, a territory or possession of
the United States, an agency or instrumentality of a State, and a
multi-State, regional, or interstate entity having governmental duties
and powers.

Sec.  418.110  Certification and disclosure.

    (a) Each person shall file a certification, and a disclosure form,
if required, with each submission that initiates agency consideration
of such person for:
    (1) Award of a Federal contract, grant, or cooperative agreement
exceeding $100,000; or
    (2) An award of a Federal loan or a commitment providing for the
United States to insure or guarantee a loan exceeding $150,000.

    (b)(1) Each person shall file a certification, and a disclosure
form, if required, upon receipt by such person of:
    (i) A Federal contract, grant, or cooperative agreement exceeding
$100,000; or
    (ii) A Federal loan or a commitment providing for the United States
to insure or guarantee a loan exceeding $150,000,
    (2) Unless such person previously filed a certification, and a
disclosure form, if required, under paragraph (a) of this section.
    (c) Each person shall file a disclosure form at the end of each
calendar quarter in which there occurs any event that requires
disclosure or that materially affects the accuracy of the information
contained in any disclosure form previously filed by such person under
paragraphs (a) or (b) of this section. An event that materially affects
the accuracy of the information reported includes:
    (1) A cumulative increase of $25,000 or more in the amount paid or
expected to be paid for influencing or attempting to influence a
covered Federal action; or
    (2) A change in the person(s) or individual(s) influencing or
attempting to influence a covered Federal action; or,
    (3) A change in the officer(s), employee(s), or Member(s) contacted
to influence or attempt to influence a covered Federal action.
    (d) Any person shall file a certification, and a disclosure form,
if required, to the next tier above who requests or receives from a
person referred to in paragraphs (a) or (b) of this section:
    (1) A subcontract exceeding $100,000 at any tier under a Federal
contract;
    (2) A subgrant, contract, or subcontract exceeding $100,000 at any
tier under a Federal grant;
    (3) A contract or subcontract exceeding $100,000 at any tier under
a Federal loan exceeding $150,000; or,
    (4) A contract or subcontract exceeding $100,000 at any tier under
a Federal cooperative agreement.
    (e) All disclosure forms, but not certifications, shall be
forwarded from tier to tier until received by the person referred to in
paragraphs (a) or (b) of this section. That person shall forward all
disclosure forms to the agency.
    (f) Any certification or disclosure form filed under paragraph (e)
of this section shall be treated as a material representation of fact
upon which all receiving tiers shall rely. All liability arising from
an erroneous representation shall be borne solely by the tier filing
that representation and shall not be shared by any tier to which the
erroneous representation is forwarded. Submitting an erroneous
certification or disclosure constitutes a failure to file the required
certification or disclosure, respectively. If a person fails to file a
required certification or disclosure, the United States may pursue all
available remedies, including those authorized by section 1352, title
31, U.S. Code.
    (g) For awards and commitments in process prior to December 23,
1989, but not made before that date, certifications shall be required
at award or commitment, covering activities occurring between December
23, 1989, and the date of award or commitment. However, for awards and
commitments in process prior to the December 23, 1989 effective date of
these provisions, but not made before December 23, 1989, disclosure
forms shall not be required at time of award or commitment but shall be
filed within 30 days.
    (h) No reporting is required for an activity paid for with
appropriated funds if that activity is allowable under either Subpart B
or C of this part.

Subpart B--Activities by Own Employees

Sec.  418.200  Agency and legislative liaison.

    (a) The prohibition on the use of appropriated funds, in Sec.
418.100 (a), does not apply in the case of a payment of reasonable
compensation made to an officer or employee of a person requesting or
receiving a Federal contract, grant, loan, or cooperative agreement if
the payment is for agency and legislative liaison activities not
directly related to a covered Federal action.
    (b) For purposes of paragraph (a) of this section, providing any
information specifically requested by an agency or Congress is
allowable at any time.
    (c) For purposes of paragraph (a) of this section, the following
agency and legislative liaison activities are allowable at any time
only where they are not related to a specific solicitation for any
covered Federal action:
    (1) Discussing with an agency (including individual demonstrations)
the qualities and characteristics of the person's products or services,
conditions or terms of sale, and service capabilities; and,
    (2) Technical discussions and other activities regarding the
application or adaptation of the person's products or services for an
agency's use.
    (d) For purposes of paragraph (a) of this section, the following
agencies and legislative liaison activities are allowable only where
they are prior to formal solicitation of any covered Federal action:
    (1) Providing any information not specifically requested but
necessary for an agency to make an informed decision about initiation
of a covered Federal action;
    (2) Technical discussions regarding the preparation of an
unsolicited proposal prior to its official submission; and,
    (3) Capability presentations by persons seeking awards from an
agency pursuant to the provisions of the Small Business Act, as amended
by Public Law 95-507 and other subsequent amendments.
    (e) Only those activities expressly authorized by this section are
allowable under this section.

Sec.  418.205  Professional and technical services.

    (a) The prohibition on the use of appropriated funds, in Sec.
418.100 (a), does not apply in the case of a payment of reasonable
compensation made to an officer or employee of a person requesting or
receiving a Federal contract, grant, loan, or cooperative agreement or
an extension, continuation, renewal, amendment, or modification of a
Federal contract, grant, loan, or cooperative agreement if payment is
for professional or technical services rendered directly in the
preparation, submission, or negotiation of any bid, proposal, or
application for that Federal contract, grant, loan, or cooperative
agreement or for meeting requirements imposed by or pursuant to law as
a condition for receiving that Federal contract, grant, loan, or
cooperative agreement.
    (b) For purposes of paragraph (a) of this section, ``professional
and technical services'' shall be limited to advice and analysis
directly applying any professional or technical discipline. For
example, drafting of a legal document accompanying a bid or proposal by
a lawyer is allowable. Similarly, technical advice provided by an
engineer on the performance or operational capability of a piece of
equipment rendered directly in the negotiation of a contract is
allowable. However, communications with the intent to influence made by
a professional (such as a licensed lawyer) or a technical person (such
as a licensed accountant) are not allowable under this section unless
they provide advice and analysis directly applying their professional
or technical expertise and unless the advice or analysis is rendered
directly and solely in the preparation, submission or negotiation of a
covered Federal action. Thus, for example, communications with the
intent to influence made by a lawyer that do not provide legal advice
or analysis directly

and solely related to the legal aspects of his or her client's
proposal, but generally advocate one proposal over another are not
allowable under this section because the lawyer is not providing
professional legal services. Similarly, communications with the intent
to influence made by an engineer providing an engineering analysis
prior to the preparation or submission of a bid or proposal are not
allowable under this section since the engineer is providing technical
services but not directly in the preparation, submission or negotiation
of a covered Federal action.
    (c) Requirements imposed by or pursuant to law as a condition for
receiving a covered Federal award include those required by law or
regulation, or reasonably expected to be required by law or regulation,
and any other requirements in the actual award documents.
    (d) Only those services expressly authorized by this section are
allowable under this section.

Sec.  418.210  Reporting.

    No reporting is required with respect to payments of reasonable
compensation made to regularly employed officers or employees of a
person.

Subpart C--Activities by Other Than Own Employees

Sec.  418.300  Professional and technical services.

    (a) The prohibition on the use of appropriated funds, in Sec.
418.100 (a), does not apply in the case of any reasonable payment to a
person, other than an officer or employee of a person requesting or
receiving a covered Federal action, if the payment is for professional
or technical services rendered directly in the preparation, submission,
or negotiation of any bid, proposal, or application for that Federal
contract, grant, loan, or cooperative agreement or for meeting
requirements imposed by or pursuant to law as a condition for receiving
that Federal contract, grant, loan, or cooperative agreement.
    (b) The reporting requirements in Sec.  418.110 (a) and (b)
regarding filing a disclosure form by each person, if required, shall
not apply with respect to professional or technical services rendered
directly in the preparation, submission, or negotiation of any
commitment providing for the United States to insure or guarantee a
loan.
    (c) For purposes of paragraph (a) of this section, ``professional
and technical services'' shall be limited to advice and analysis
directly applying any professional or technical discipline. For
example, drafting of a legal document accompanying a bid or proposal by
a lawyer is allowable. Similarly, technical advice provided by an
engineer on the performance or operational capability of a piece of
equipment rendered directly in the negotiation of a contract is
allowable. However, communications with the intent to influence made by
a professional (such as a licensed lawyer) or a technical person (such
as a licensed accountant) are not allowable under this section unless
they provide advice and analysis directly applying their professional
or technical expertise and unless the advice or analysis is rendered
directly and solely in the preparation, submission or negotiation of a
covered Federal action. Thus, for example, communications with the
intent to influence made by a lawyer that do not provide legal advice
or analysis directly and solely related to the legal aspects of his or
her client's proposal, but generally advocate one proposal over another
are not allowable under this section because the lawyer is not
providing professional legal services. Similarly, communications with
the intent to influence made by an engineer providing an engineering
analysis prior to the preparation or submission of a bid or proposal
are not allowable under this section since the engineer is providing
technical services but not directly in the preparation, submission or
negotiation of a covered Federal action.
    (d) Requirements imposed by or pursuant to law as a condition for
receiving a covered Federal award include those required by law or
regulation, or reasonably expected to be required by law or regulation,
and any other requirements in the actual award documents.
    (e) Persons other than officers or employees of a person requesting
or receiving a covered Federal action include consultants and trade
associations.
    (f) Only those services expressly authorized by this section are
allowable under this section.

Subpart D--Penalties and Enforcement