the Federal award and non-Federal entity contributions rather than to
increase the funds committed to the project.
    (2) Addition. With prior approval of the HHS awarding agency
(except for IHEs and nonprofit research institutions, as described in
paragraph (e) of this section), program income may be added to the
Federal award by the Federal agency and the non-Federal entity. The
program income must be used for the purposes and under the conditions
of the Federal award.
    (3) Cost sharing or matching. With prior approval of the HHS
awarding agency, program income may be used to meet the cost sharing or
matching requirement of the Federal award. The amount of the Federal
award remains the same.
    (f) Income after the period of performance. There are no Federal
requirements governing the disposition of income earned after the end
of the period of performance for the Federal award, unless the HHS
awarding agency regulations or the terms and conditions of the award
provide otherwise. The HHS awarding agency may negotiate agreements
with recipients regarding appropriate uses of income earned after the
period of performance as part of the grant closeout process. See also
Sec.  75.381.
    (g) Unless the Federal statute, regulations, or terms and
conditions for the Federal award provide otherwise, the non-Federal
entity has no obligation to the HHS awarding agency with respect to
program income earned from license fees and royalties for copyrighted
material, patents, patent applications, trademarks, and inventions made
under a Federal award to which 37 CFR part 401, ``Rights to Inventions
Made by Nonprofit Organizations and Small Business Firms under
Government Awards, Contracts and Cooperative Agreements'' is
applicable.

Sec.  75.308  Revision of budget and program plans.

    (a) The approved budget for the Federal award summarizes the
financial aspects of the project or program as approved during the
Federal award process. It may include either the Federal and non-
Federal share (see Sec.  75.2 Federal share) or only the Federal share,
depending upon HHS awarding agency requirements. It must be related to
performance for program evaluation purposes whenever appropriate.
    (b) Recipients are required to report deviations from budget or
project scope or objective, and request prior approvals from HHS
awarding agencies for budget and program plan revisions, in accordance
with this section.
    (c) For non-construction Federal awards, recipients must request
prior approvals from HHS awarding agencies for one or more of the
following program or budget-related reasons:
    (1) Change in the scope or the objective of the project or program
(even if there is no associated budget revision requiring prior written
approval).

    (2) Change in a key person specified in the application or the
Federal award.
    (3) The disengagement from the project for more than three months,
or a 25 percent reduction in time devoted to the project, by the
approved project director or principal investigator.
    (4) The inclusion, unless waived by the HHS awarding agency, of
costs that require prior approval in accordance with Subpart E of this
part or Appendix IX of this part, or 48 CFR part 31, as applicable.
    (5) The transfer of funds budgeted for participant support costs as
defined in Sec.  75.2 Participant support costs to other categories of
expense.
    (6) Unless described in the application and funded in the approved
Federal awards, the subawarding, transferring or contracting out of any
work under a Federal award. This provision does not apply to the
acquisition of supplies, material, equipment or general support
services.
    (7) Changes in the approved cost-sharing or matching provided by
the non-Federal entity. No other prior approval requirements for
specific items may be imposed unless an exception has been approved by
OMB. See also Sec. Sec.  75.102 and 75.407.
    (8) A fixed amount subaward as described in Sec.  75.353.
    (9) The inclusion of research patient care costs in research awards
made for the performance of research work.
    (10) The provision of subawards by a pass-through entity on fixed
amounts up to the Simplified Acquisition Threshold, provided that the
subawards meet the requirements for fixed amount awards in Sec.
75.201. See Sec.  75.353.
    (11) The recipient wishes to dispose of, replace, or encumber title
to real property, equipment, or intangible property that are acquired
or improved with a Federal award. See Sec. Sec.  75.318, 75.320,
75.322, and 75.323.
    (12) The need arises for additional Federal funds to complete the
project.
    (d) Except for requirements listed in paragraph (c)(1) of this
section, the HHS awarding agencies are authorized, at their option, to
waive prior written approvals required by paragraph (c) this section.
Such waivers may include authorizing recipients to do any one or more
of the following:
    (1) Incur project costs 90 calendar days before the HHS awarding
agency makes the Federal award. Expenses more than 90 calendar days
pre-award require prior approval of the HHS awarding agency. All costs
incurred before the HHS awarding agency makes the Federal award are at
the recipient's risk (i.e., the HHS awarding agency is under no
obligation to reimburse such costs if for any reason the recipient does
not receive a Federal award or if the Federal award is less than
anticipated and inadequate to cover such costs). See also Sec.  75.458.
    (2) Initiate a one-time extension of the period of performance by
up to 12 months unless one or more of the conditions outlined in
paragraphs (d)(2)(i) through (iii) of this section apply. For one-time
extensions, the recipient must notify the HHS awarding agency in
writing with the supporting reasons and revised period of performance
at least 10 calendar days before the end of the period of performance
specified in the Federal award. This one-time extension may not be
exercised merely for the purpose of using unobligated balances.
Extensions require explicit prior HHS awarding agency approval when:
    (i) The terms and conditions of the Federal award prohibit the
extension.
    (ii) The extension requires additional Federal funds.
    (iii) The extension involves any change in the approved objectives
or scope of the project.
    (3) Carry forward unobligated balances to subsequent periods of
performance.
    (4) For Federal awards that support research, unless the HHS
awarding agency provides otherwise in the Federal award or in the HHS
awarding agency's regulations, the prior approval requirements
described in paragraph (d) are automatically waived (i.e., recipients
need not obtain such prior approvals) unless one of the conditions
included in paragraph (d)(2) applies.
    (e) The HHS awarding agency may, at its option, restrict the
transfer of funds among direct cost categories or programs, functions
and activities for Federal awards in which the Federal share of the
project exceeds the Simplified Acquisition Threshold and the cumulative
amount of such transfers exceeds or is expected to exceed 10 percent of
the total budget as last approved by the HHS awarding agency. The HHS
awarding agency cannot permit a transfer that would cause any Federal
appropriation to be used for purposes other than those consistent with
the appropriation.
    (f) All other changes to non-construction budgets, except for the
changes described in paragraph (c) of this section, do not require
prior approval (see also Sec.  75.407).
    (g) For construction Federal awards, the recipient must request
prior written approval promptly from the HHS awarding agency for budget
revisions whenever paragraph (g)(1), (2), or (3) of this section
applies.
    (1) The revision results from changes in the scope or the objective
of the project or program.
    (2) The need arises for additional Federal funds to complete the
project.
    (3) A revision is desired which involves specific costs for which
prior written approval requirements may be imposed consistent with
applicable OMB cost principles listed in Subpart E of this part.
    (4) No other prior approval requirements for budget revisions may
be imposed unless an exception has been approved by OMB.
    (5) When an HHS awarding agency makes a Federal award that provides
support for construction and non-construction work, the HHS awarding
agency may require the recipient to obtain prior approval from the HHS
awarding agency before making any fund or budget transfers between the
two types of work supported.
    (h) When requesting approval for budget revisions, the recipient
must use the same format for budget information that was used in the
application, unless the HHS awarding agency indicates a letter of
request suffices.
    (i) Within 30 calendar days from the date of receipt of the request
for budget revisions, the HHS awarding agency must review the request
and notify the recipient whether the budget revisions have been
approved. If the revision is still under consideration at the end of 30
calendar days, the HHS awarding agency must inform the recipient in
writing of the date when the recipient may expect the decision.
    (j) All approvals granted in keeping with the provisions of this
section shall not be valid unless they are in writing, and signed by at
least one of the following HHS officials:
    (1) The Head of the HHS awarding agency that made the award or
subordinate official with proper delegated authority from the Head,
including the Head of the Regional Office of the HHS awarding agency
that made the award; or
    (2) The responsible Grants Officer of the HHS awarding agency that
made the award or an individual duly authorized by the Grants Officer.

Sec.  75.309  Period of performance and availability of funds.

    (a) A non-Federal entity may charge to the Federal award only
allowable costs incurred during the period of performance (except as
described in Sec.  75.461) and any costs incurred before the HHS
awarding agency or pass-through entity made the Federal award that were
authorized by the Federal awarding agency or pass-through entity.

Funds available to pay allowable costs during the period of performance
include both Federal funds awarded and carryover balances.
    (b) A non-Federal entity must liquidate all obligations incurred
under the award not later than 90 days after the end of the funding
period (or as specified in a program regulation) to coincide with the
submission of the final Federal Financial Report (FFR). This deadline
may be extended with prior written approval from the HHS awarding
agency.

Sec.  75.310-Sec.  75.315  [Reserved]

Property Standards

Sec.  75.316  Purpose of property standards.

    Sections 75.317 through 75.323 set forth uniform standards
governing management and disposition of property furnished by HHS or
whose cost was charged directly to a project supported by an HHS award.
The HHS awarding agency may not impose additional requirements, unless
specifically required to do so by Federal statute. The recipient may
use its own property management standards and procedures provided they
meet the provisions of these sections.

Sec.  75.317  Insurance coverage.

    The non-Federal entity must, at a minimum, provide the equivalent
insurance coverage for real property and equipment acquired or improved
with Federal funds as provided to other property owned by the non-
Federal entity. Federally-owned property need not be insured unless
required by the terms and conditions of the Federal award.

Sec.  75.318  Real property.

    (a) Title. Subject to the obligations and conditions set forth in
this section, title to real property acquired or improved under a
Federal award will vest upon acquisition in the non-Federal entity.
    (b) Use. (1) Except as otherwise provided by Federal statutes or by
the HHS awarding agency, real property will be used for the originally
authorized purpose as long as needed for that purpose, during which
time the non-Federal entity must not dispose of or encumber its title
or other interests.
    (2) The non-Federal entity shall obtain written approval from the
HHS awarding agency for the use of real property in other federally-
sponsored projects when the recipient determines that the property is
no longer needed for the purpose of the original project. Use in other
projects shall be limited to those under federally-sponsored projects
(i.e., awards) or programs that have purpose consistent with those
authorized for support by the HHS awarding agency.
    (c) Disposition. When real property is no longer needed as provided
in subsection (b), the non-Federal entity must obtain disposition
instructions from the HHS awarding agency or pass-through entity. The
instructions must provide for one of the following alternatives:
    (1) Retain title after compensating the HHS awarding agency. The
amount paid to the HHS awarding agency will be computed by applying the
HHS awarding agency's percentage of participation in the cost of the
original purchase (and costs of any improvements) to the fair market
value of the property. However, in those situations where the non-
Federal entity is disposing of real property acquired or improved with
a Federal award and acquiring replacement real property under the same
Federal award, the net proceeds from the disposition may be used as an
offset to the cost of the replacement property.
    (2) Sell the property and compensate the HHS awarding agency. The
amount due to the HHS awarding agency will be calculated by applying
the HHS awarding agency's percentage of participation in the cost of
the original purchase (and cost of any improvements) to the proceeds of
the sale after deduction of any actual and reasonable selling and
fixing-up expenses. If the Federal award has not been closed out, the
net proceeds from sale may be offset against the original cost of the
property. When the non-Federal entity is directed to sell property,
sales procedures must be followed that provide for competition to the
extent practicable and result in the highest possible return.
    (3) Transfer title to the HHS awarding agency or to a third party
designated/approved by the HHS awarding agency. The non-Federal entity
is entitled to be paid an amount calculated by applying the non-Federal
entity's percentage of participation in the purchase of the real
property (and cost of any improvements) to the current fair market
value of the property.

Sec.  75.319  Federally-owned and exempt property.

    (a) Title to Federally-owned property remains vested in the Federal
Government. The non-Federal entity must submit annually an inventory
listing of Federally-owned property in its custody to the HHS awarding
agency. Upon completion of the Federal award or when the property is no
longer needed, the non-Federal entity must report the property to the
HHS awarding agency for further Federal agency utilization.
    (b) If the HHS awarding agency has no further need for the
property, it must declare the property excess and report it for
disposal to the appropriate Federal disposal authority, unless the HHS
awarding agency has statutory authority to dispose of the property by
alternative methods (e.g., the authority provided by the Federal
Technology Transfer Act (15 U.S.C. 3710 (i)) to donate research
equipment to educational and non-profit organizations in accordance
with Executive Order 12999). The HHS awarding agency must issue
appropriate instructions to the non-Federal entity.
    (c) Exempt Federally-owned property means property acquired under a
Federal award where the HHS awarding agency has chosen to vest title to
the property to the non-Federal entity without further obligation to
the Federal Government, based upon the explicit terms and conditions of
the Federal award. The HHS awarding agency may exercise this option
when statutory authority exists. Absent statutory authority and
specific terms and conditions of the Federal award, title to exempt
Federally-owned property acquired under the Federal award remains with
the Federal Government.

Sec.  75.320  Equipment.

    See also Sec.  75.439.
    (a) Title. Subject to the obligations and conditions set forth in
this section, title to equipment acquired under a Federal award will
vest upon acquisition in the non-Federal entity. Unless a statute
specifically authorizes the Federal agency to vest title in the non-
Federal entity without further obligation to the Federal Government,
and the Federal agency elects to do so, the title must be a conditional
title. Title must vest in the non-Federal entity subject to the
following conditions:
    (1) Use the equipment for the authorized purposes of the project
during the period of performance, or until the property is no longer
needed for the purposes of the project.
    (2) Not encumber the property without approval of the HHS awarding
agency or pass-through entity.
    (3) Use and dispose of the property in accordance with paragraphs
(b), (c) and (e) of this section.
    (b) A state must use, manage and dispose of equipment acquired
under a Federal award by the state in accordance with state laws and
procedures. Other non-Federal entities must follow paragraphs (c)
through (e) of this section.

    (c) Use. (1) Equipment must be used by the non-Federal entity in
the program or project for which it was acquired as long as needed,
whether or not the project or program continues to be supported by the
Federal award, and the non-Federal entity must not encumber the
property without prior approval of the HHS awarding agency. When no
longer needed for the original program or project, the equipment may be
used in other activities supported by the HHS awarding agency, in the
following order of priority:
    (i) Activities under a Federal award from the HHS awarding agency
which funded the original program or project, then
    (ii) Activities under Federal awards from other HHS awarding
agencies. This includes consolidated equipment for information
technology systems.
    (2) During the time that equipment is used on the project or
program for which it was acquired, the non-Federal entity must also
make the equipment available for use on other projects or programs
currently or previously supported by the Federal Government, provided
that such use will not interfere with the work on the projects or
program for which it was originally acquired. First preference for
other use must be given to other programs or projects supported by the
HHS awarding agency that financed the equipment and second preference
must be given to programs or projects under Federal awards from other
Federal awarding agencies. Use for non-federally-funded programs or
projects is also permissible. User fees should be considered if
appropriate.
    (3) Notwithstanding the encouragement in Sec.  75.307 to earn
program income, the non-Federal entity must not use equipment acquired
with the Federal award to provide services for a fee that is less than
private companies charge for equivalent services unless specifically
authorized by Federal statute for as long as the Federal Government
retains an interest in the equipment.
    (4) When acquiring replacement equipment, the non-Federal entity
may use the equipment to be replaced as a trade-in or sell the property
and use the proceeds to offset the cost of the replacement property
subject to the approval of the HHS awarding agency.
    (d) Management requirements. Procedures for managing equipment
(including replacement equipment), whether acquired in whole or in part
under a Federal award, until disposition takes place will, as a
minimum, meet the following requirements:
    (1) Property records must be maintained that include a description
of the property, a serial number or other identification number, the
source of funding for the property (including the FAIN), who holds
title, the acquisition date, and cost of the property, percentage of
Federal participation in the project costs for the Federal award under
which the property was acquired, the location, use and condition of the
property, and any ultimate disposition data including the date of
disposal and sale price of the property.
    (2) A physical inventory of the property must be taken and the
results reconciled with the property records at least once every two
years.
    (3) A control system must be developed to ensure adequate
safeguards to prevent loss, damage, or theft of the property. Any loss,
damage, or theft must be investigated.
    (4) Adequate maintenance procedures must be developed to keep the
property in good condition.
    (5) If the non-Federal entity is authorized or required to sell the
property, proper sales procedures must be established to ensure the
highest possible return.
    (e) Disposition. When original or replacement equipment acquired
under a Federal award is no longer needed for the original project or
program or for other activities currently or previously supported by a
HHS awarding agency, except as otherwise provided in Federal statutes,
regulations, or HHS awarding agency disposition instructions, the non-
Federal entity must request disposition instructions from the HHS
awarding agency if required by the terms and conditions of the Federal
award. Disposition of the equipment will be made as follows, in
accordance with HHS awarding agency disposition instructions:
    (1) Items of equipment with a current per unit fair market value of
$5,000 or less may be retained, sold or otherwise disposed of with no
further obligation to the HHS awarding agency.
    (2) Except as provided in Sec.  75.319(b), or if the HHS awarding
agency fails to provide requested disposition instructions within 120
days, items of equipment with a current per-unit fair-market value in
excess of $5,000 may be retained by the non-Federal entity or sold. The
HHS awarding agency is entitled to an amount calculated by multiplying
the current market value or proceeds from sale by the HHS awarding
agency's percentage of participation in the cost of the original
purchase. If the equipment is sold, the HHS awarding agency may permit
the non-Federal entity to deduct and retain from the Federal share $500
or ten percent of the proceeds, whichever is less, for its selling and
handling expenses.
    (3) The non-Federal entity may transfer title to the property to
the Federal Government or to an eligible third party provided that, in
such cases, the non-Federal entity must be entitled to compensation for
its attributable percentage of the current fair market value of the
property.
    (4) In cases where a non-Federal entity fails to take appropriate
disposition actions, the HHS awarding agency may direct the non-Federal
entity to take disposition actions.

Sec.  75.321  Supplies.

    See also Sec.  75.453.
    (a) Title to supplies will vest in the non-Federal entity upon
acquisition. If there is a residual inventory of unused supplies
exceeding $5,000 in total aggregate value upon termination or
completion of the project or program and the supplies are not needed
for any other Federal award, the non-Federal entity must retain the
supplies for use on other activities or sell them, but must, in either
case, compensate the Federal Government for its share. The amount of
compensation must be computed in the same manner as for equipment. See
Sec.  75.320(e)(2) for the calculation methodology.
    (b) As long as the Federal Government retains an interest in the
supplies, the non-Federal entity must not use supplies acquired under a
Federal award to provide services to other organizations for a fee that
is less than private companies charge for equivalent services, unless
specifically authorized by Federal statute.

Sec.  75.322  Intangible property and copyrights.

    (a) Title to intangible property (see Sec.  75.2 Intangible
property) acquired under a Federal award vests upon acquisition in the
non-Federal entity. The non-Federal entity must use that property for
the originally-authorized purpose, and must not encumber the property
without approval of the HHS awarding agency. When no longer needed for
the originally authorized purpose, disposition of the intangible
property must occur in accordance with the provisions in Sec.
75.320(e).
    (b) The non-Federal entity may copyright any work that is subject
to copyright and was developed, or for which ownership was acquired,
under a Federal award. The HHS awarding agency reserves a royalty-free,
nonexclusive and irrevocable right to reproduce, publish, or otherwise
use the

work for Federal purposes, and to authorize others to do so.
    (c) The non-Federal entity is subject to applicable regulations
governing patents and inventions, including government-wide regulations
issued by the Department of Commerce at 37 CFR part 401.
    (d) The Federal Government has the right to:
    (1) Obtain, reproduce, publish, or otherwise use the data produced
under a Federal award; and
    (2) Authorize others to receive, reproduce, publish, or otherwise
use such data
    (e) Freedom of Information Act (FOIA).
    (1) In response to a Freedom of Information Act (FOIA) request for
research data relating to published research findings produced under a
Federal award that were used by the Federal Government in developing an
agency action that has the force and effect of law, the HHS awarding
agency must request, and the non-Federal entity must provide, within a
reasonable time, the research data so that they can be made available
to the public through the procedures established under the FOIA. If the
HHS awarding agency obtains the research data solely in response to a
FOIA request, the HHS awarding agency may charge the requester a
reasonable fee equaling the full incremental cost of obtaining the
research data. This fee should reflect costs incurred by the Federal
agency and the non-Federal entity. This fee is in addition to any fees
the HHS awarding agency may assess under the FOIA (5 U.S.C.
552(a)(4)(A)).
    (2) Published research findings means when:
    (i) Research findings are published in a peer-reviewed scientific
or technical journal; or
    (ii) A Federal agency publicly and officially cites the research
findings in support of an agency action that has the force and effect
of law. ``Used by the Federal Government in developing an agency action
that has the force and effect of law'' is defined as when an agency
publicly and officially cites the research findings in support of an
agency action that has the force and effect of law.
    (3) Research data means the recorded factual material commonly
accepted in the scientific community as necessary to validate research
findings, but not any of the following: Preliminary analyses, drafts of
scientific papers, plans for future research, peer reviews, or
communications with colleagues. This ``recorded'' material excludes
physical objects (e.g., laboratory samples). Research data also do not
include:
    (i) Trade secrets, commercial information, materials necessary to
be held confidential by a researcher until they are published, or
similar information which is protected under law; and
    (ii) Personnel and medical information and similar information the
disclosure of which would constitute a clearly unwarranted invasion of
personal privacy, such as information that could be used to identify a
particular person in a research study.
    (f) The requirements set forth in paragraph (e)(1) of this section
do not apply to commercial organizations

Sec.  75.323  Property trust relationship.

    Real property, equipment, and intangible property, that are
acquired or improved with a Federal award must be held in trust by the
non-Federal entity as trustee for the beneficiaries of the project or
program under which the property was acquired or improved. The HHS
awarding agency may require the non-Federal entity to record liens or
other appropriate notices of record to indicate that personal or real
property has been acquired or improved with a Federal award and that
use and disposition conditions apply to the property.

Sec.  75.324--Sec.  75.325  [Reserved]

Procurement Standards

Sec.  75.326  Procurements by states.

    When procuring property and services under a Federal award, a state
must follow the same policies and procedures it uses for procurements
from its non-Federal funds. The state will comply with Sec.  75.331 and
ensure that every purchase order or other contract includes any clauses
required by Sec.  75.335. All other non-Federal entities, including
subrecipients of a state, will follow Sec. Sec.  75.327 through 75.335.

Sec.  75.327  General procurement standards.

    (a) The non-Federal entity must use its own documented procurement
procedures which reflect applicable State, local, and tribal laws and
regulations, provided that the procurements conform to applicable
Federal law and the standards identified in this part.
    (b) Non-Federal entities must maintain oversight to ensure that
contractors perform in accordance with the terms, conditions, and
specifications of their contracts or purchase orders.
    (c)(1) The non-Federal entity must maintain written standards of
conduct covering conflicts of interest and governing the actions of its
employees engaged in the selection, award and administration of
contracts. No employee, officer, or agent may participate in the
selection, award, or administration of a contract supported by 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 firm considered for a contract. The
officers, employees, and agents of the non-Federal entity may neither
solicit nor accept gratuities, favors, or anything of monetary value
from contractors or parties to subcontracts. However, non-Federal
entities 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
relationships with a parent company, affiliate, or subsidiary
organization, the non-Federal entity is unable or appears to be unable
to be impartial in conducting a procurement action involving a related
organization.
    (d) The non-Federal entity's procedures must avoid acquisition of
unnecessary or duplicative items. Consideration should be given to
consolidating or breaking out procurements to obtain a more economical
purchase. Where appropriate, an analysis will be made of lease versus
purchase alternatives, and any other appropriate analysis to determine
the most economical approach.
    (e) To foster greater economy and efficiency, and in accordance
with efforts to promote cost-effective use of shared services across
the Federal Government, the non-Federal entity is encouraged to enter
into state and local intergovernmental agreements or inter-entity
agreements where appropriate for procurement or use of common or shared
goods and services.
    (f) The non-Federal entity is encouraged to use Federal excess and
surplus property in lieu of purchasing

new equipment and property whenever such use is feasible and reduces
project costs.
    (g) The non-Federal entity is encouraged to use value engineering
clauses in contracts for construction projects of sufficient size to
offer reasonable opportunities for cost reductions. Value engineering
is a systematic and creative analysis of each contract item or task to
ensure that its essential function is provided at the overall lower
cost.
    (h) The non-Federal entity must award contracts only to responsible
contractors possessing the ability to perform successfully under the
terms and conditions of a proposed procurement. Consideration will be
given to such matters as contractor integrity, compliance with public
policy, record of past performance, and financial and technical
resources. In certain circumstances, contracts with certain parties are
restricted by agencies' implementation of Executive Orders 12549 and
12689. (See 2 CFR part 376.)
    (i) The non-Federal entity must maintain records sufficient to
detail the history of procurement. These records will include, but are
not necessarily limited to the following: rationale for the method of
procurement, selection of contract type, contractor selection or
rejection, and the basis for the contract price.
    (j)(1) The non-Federal entity may use a time and materials type
contract only after a determination that no other contract is suitable
and if the contract includes a ceiling price that the contractor
exceeds at its own risk. Time and materials type contract means a
contract whose cost to a non-Federal entity is the sum of:
    (i) The actual cost of materials; and
    (ii) Direct labor hours charged at fixed hourly rates that reflect
wages, general and administrative expenses, and profit.
    (2) Since this formula generates an open-ended contract price, a
time-and-materials contract provides no positive profit incentive to
the contractor for cost control or labor efficiency. Therefore, each
contract must set a ceiling price that the contractor exceeds at its
own risk. Further, the non-Federal entity awarding such a contract must
assert a high degree of oversight in order to obtain reasonable
assurance that the contractor is using efficient methods and effective
cost controls.
    (k) The non-Federal entity alone must be responsible, in accordance
with good administrative practice and sound business judgment, for the
settlement of all contractual and administrative issues arising out of
procurements. These issues include, but are not limited to, source
evaluation, protests, disputes, and claims. These standards do not
relieve the non-Federal entity of any contractual responsibilities
under its contracts. The HHS awarding agency will not substitute its
judgment for that of the non-Federal entity unless the matter is
primarily a Federal concern. Violations of law will be referred to the
local, tribal, state, or Federal authority having proper jurisdiction.
    (l) The type of procuring instruments used must be determined by
the recipient but shall be appropriate for the particular procurement
and for promoting the best interest of the program or project involved.

Sec.  75.328  Competition.

    (a) All procurement transactions must be conducted in a manner
providing full and open competition consistent with the standards of
this section. In order to ensure objective contractor performance and
eliminate unfair competitive advantage, contractors that develop or
draft specifications, requirements, statements of work, or invitations
for bids or requests for proposals must be excluded from competing for
such procurements. Some of the situations considered to be restrictive
of competition include but are not limited to:
    (1) Placing unreasonable requirements on firms in order for them to
qualify to do business;
    (2) Requiring unnecessary experience and excessive bonding;
    (3) Noncompetitive pricing practices between firms or between
affiliated companies;
    (4) Noncompetitive contracts to consultants that are on retainer
contracts;
    (5) Organizational conflicts of interest;
    (6) Specifying only a ``brand name'' product instead of allowing
``an equal'' product to be offered and describing the performance or
other relevant requirements of the procurement; and
    (7) Any arbitrary action in the procurement process.
    (b) The non-Federal entity must conduct procurements in a manner
that prohibits the use of statutorily or administratively imposed
state, local, or tribal geographical preferences in the evaluation of
bids or proposals, except in those cases where applicable Federal
statutes expressly mandate or encourage geographic preference. Nothing
in this section preempts state licensing laws. When contracting for
architectural and engineering (A/E) services, geographic location may
be a selection criterion provided its application leaves an appropriate
number of qualified firms, given the nature and size of the project, to
compete for the contract.
    (c) The non-Federal entity must have written procedures for
procurement transactions. These procedures must ensure that all
solicitations:
    (1) Incorporate a clear and accurate description of the technical
requirements for the material, product, or service to be procured. Such
description must not, in competitive procurements, contain features
which unduly restrict competition. The description may include a
statement of the qualitative nature of the material, product or service
to be procured and, when necessary, must set forth those minimum
essential characteristics and standards to which it must conform if it
is to satisfy its intended use. Detailed product specifications should
be avoided if at all possible. When it is impractical or uneconomical
to make a clear and accurate description of the technical requirements,
a ``brand name or equivalent'' description may be used as a means to
define the performance or other salient requirements of procurement.
The specific features of the named brand which must be met by offers
must be clearly stated; and
    (2) Identify all requirements which the offerors must fulfill and
all other factors to be used in evaluating bids or proposals.
    (d) The non-Federal entity must ensure that all prequalified lists
of persons, firms, or products which are used in acquiring goods and
services are current and include enough qualified sources to ensure
maximum open and free competition. Also, the non-Federal entity must
not preclude potential bidders from qualifying during the solicitation
period.

Sec.  75.329  Procurement procedures.

    The non-Federal entity must use one of the following methods of
procurement.
    (a) Procurement by micro-purchases. Procurement by micro-purchase
is the acquisition of supplies or services, the aggregate dollar amount
of which does not exceed the micro-purchase threshold (See micro-
purchase). To the extent practicable, the non-Federal entity must
distribute micro-purchases equitably among qualified suppliers. Micro-
purchases may be awarded without soliciting competitive quotations if
the non-Federal entity considers the price to be reasonable.
    (b) Procurement by small purchase procedures. Small purchase
procedures are those relatively simple and informal procurement methods
for securing services, supplies, or other property that do not cost
more than the Simplified

Acquisition Threshold. If small purchase procedures are used, price or
rate quotations must be obtained from an adequate number of qualified
sources.
    (c) Procurement by sealed bids (formal advertising). Bids are
publicly solicited and a firm fixed price contract (lump sum or unit
price) is awarded to the responsible bidder whose bid, conforming with
all the material terms and conditions of the invitation for bids, is
the lowest in price. The sealed bid method is the preferred method for
procuring construction, if the conditions in paragraph (c)(1) of this
section apply.
    (1) In order for sealed bidding to be feasible, the following
conditions should be present:
    (i) A complete, adequate, and realistic specification or purchase
description is available;
    (ii) Two or more responsible bidders are willing and able to
compete effectively for the business; and
    (iii) The procurement lends itself to a firm fixed price contract
and the selection of the successful bidder can be made principally on
the basis of price.
    (2) If sealed bids are used, the following requirements apply:
    (i) Bids must be solicited from an adequate number of known
suppliers, providing them sufficient response time prior to the date
set for opening the bids, for state, local, and tribal governments, the
invitation for bids must be publically advertised;
    (ii) The invitation for bids, which will include any specifications
and pertinent attachments, must define the items or services in order
for the bidder to properly respond;
    (iii) All bids will be opened at the time and place prescribed in
the invitation for bids, for state, local, and tribal governments, the
bids must be opened publically;
    (iv) A firm fixed price contract award will be made in writing to
the lowest responsive and responsible bidder. Where specified in
bidding documents, factors such as discounts, transportation cost, and
life cycle costs must be considered in determining which bid is lowest.
Payment discounts will only be used to determine the low bid when prior
experience indicates that such discounts are usually taken advantage
of; and
    (v) Any or all bids may be rejected if there is a sound documented
reason.
    (d) Procurement by competitive proposals. The technique of
competitive proposals is normally conducted with more than one source
submitting an offer, and either a fixed price or cost-reimbursement
type contract is awarded. It is generally used when conditions are not
appropriate for the use of sealed bids. If this method is used, the
following requirements apply:
    (1) Requests for proposals must be publicized and identify all
evaluation factors and their relative importance. Any response to
publicized requests for proposals must be considered to the maximum
extent practical;
    (2) Proposals must be solicited from an adequate number of
qualified sources;
    (3) The non-Federal entity must have a written method for
conducting technical evaluations of the proposals received and for
selecting recipients;
    (4) Contracts must be awarded to the responsible firm whose
proposal is most advantageous to the program, with price and other
factors considered; and
    (5) The non-Federal entity may use competitive proposal procedures
for qualifications-based procurement of architectural/engineering (A/E)
professional services whereby competitors' qualifications are evaluated
and the most qualified competitor is selected, subject to negotiation
of fair and reasonable compensation. The method, where price is not
used as a selection factor, can only be used in procurement of A/E
professional services. It cannot be used to purchase other types of
services though A/E firms are a potential source to perform the
proposed effort.
    (e) [Reserved]
    (f) Procurement by noncompetitive proposals. Procurement by
noncompetitive proposals is procurement through solicitation of a
proposal from only one source and may be used only when one or more of
the following circumstances apply:
    (1) The item is available only from a single source;
    (2) The public exigency or emergency for the requirement will not
permit a delay resulting from competitive solicitation;
    (3) The HHS awarding agency or pass-through entity expressly
authorizes noncompetitive proposals in response to a written request
from the non-Federal entity; or
    (4) After solicitation of a number of sources, competition is
determined inadequate.

Sec.  75.330  Contracting with small and minority businesses, women's
business enterprises, and labor surplus area firms.

    (a) The non-Federal entity must take all necessary affirmative
steps to assure that minority businesses, women's business enterprises,
and labor surplus area firms are used when possible.
    (b) Affirmative steps must include:
    (1) Placing qualified small and minority businesses and women's
business enterprises on solicitation lists;
    (2) Assuring that small and minority businesses, and women's
business enterprises are solicited whenever they are potential sources;
    (3) Dividing total requirements, when economically feasible, into
smaller tasks or quantities to permit maximum participation by small
and minority businesses, and women's business enterprises;
    (4) Establishing delivery schedules, where the requirement permits,
which encourage participation by small and minority businesses, and
women's business enterprises;
    (5) Using the services and assistance, as appropriate, of such
organizations as the Small Business Administration and the Minority
Business Development Agency of the Department of Commerce; and
    (6) Requiring the prime contractor, if subcontracts are to be let,
to take the affirmative steps listed in paragraphs (b)(1) through (5)
of this section.

Sec.  75.331  Procurement of recovered materials.

    A non-Federal entity that is a state agency or agency of a
political subdivision of a state and its contractors must comply with
section 6002 of the Solid Waste Disposal Act, as amended by the
Resource Conservation and Recovery Act. The requirements of Section
6002 include procuring only items designated in guidelines of the
Environmental Protection Agency (EPA) at 40 CFR part 247 that contain
the highest percentage of recovered materials practicable, consistent
with maintaining a satisfactory level of competition, where the
purchase price of the item exceeds $10,000 or the value of the quantity
acquired during the preceding fiscal year exceeded $10,000; procuring
solid waste management services in a manner that maximizes energy and
resource recovery; and establishing an affirmative procurement program
for procurement of recovered materials identified in the EPA
guidelines.

Sec.  75.332  Contract cost and price.

    (a) The non-Federal entity must perform a cost or price analysis in
connection with every procurement action in excess of the Simplified
Acquisition Threshold including contract modifications. The method and
degree of analysis is dependent on the facts surrounding the particular
procurement situation, but as a starting point, the non-Federal entity
must make

independent estimates before receiving bids or proposals.
    (b) The non-Federal entity must negotiate profit as a separate
element of the price for each contract in which there is no price
competition and in all cases where cost analysis is performed. To
establish a fair and reasonable profit, consideration must be given to
the complexity of the work to be performed, the risk borne by the
contractor, the contractor's investment, the amount of subcontracting,
the quality of its record of past performance, and industry profit
rates in the surrounding geographical area for similar work.
    (c) Costs or prices based on estimated costs for contracts under
the Federal award are allowable only to the extent that costs incurred
or cost estimates included in negotiated prices would be allowable for
the non-Federal entity under Subpart E of this part. The non-Federal
entity may reference its own cost principles that comply with the
Federal cost principles.
    (d) The cost plus a percentage of cost and percentage of
construction cost methods of contracting must not be used.

Sec.  75.333  HHS awarding agency or pass-through entity review.

    (a) The non-Federal entity must make available, upon request of the
HHS awarding agency or pass-through entity, technical specifications on
proposed procurements where the HHS awarding agency or pass-through
entity believes such review is needed to ensure that the item or
service specified is the one being proposed for acquisition. This
review generally will take place prior to the time the specification is
incorporated into a solicitation document. However, if the non-Federal
entity desires to have the review accomplished after a solicitation has
been developed, the HHS awarding agency or pass-through entity may
still review the specifications, with such review usually limited to
the technical aspects of the proposed purchase.
    (b) The non-Federal entity must make available upon request, for
the HHS awarding agency or pass-through entity pre-procurement review,
procurement documents, such as requests for proposals or invitations
for bids, or independent cost estimates, when:
    (1) The non-Federal entity's procurement procedures or operation
fails to comply with the procurement standards in this part;
    (2) The procurement is expected to exceed the Simplified
Acquisition Threshold and is to be awarded without competition or only
one bid or offer is received in response to a solicitation;
    (3) The procurement, which is expected to exceed the Simplified
Acquisition Threshold, specifies a ``brand name'' product;
    (4) The proposed contract is more than the Simplified Acquisition
Threshold and is to be awarded to other than the apparent low bidder
under a sealed bid procurement; or
    (5) A proposed contract modification changes the scope of a
contract or increases the contract amount by more than the Simplified
Acquisition Threshold.
    (c) The non-Federal entity is exempt from the pre-procurement
review in paragraph (b) of this section if the HHS awarding agency or
pass-through entity determines that its procurement systems comply with
the standards of this part.
    (1) The non-Federal entity may request that its procurement system
be reviewed by the HHS awarding agency or pass-through entity to
determine whether its system meets these standards in order for its
system to be certified. Generally, these reviews must occur where there
is continuous high-dollar funding, and third party contracts are
awarded on a regular basis;
    (2) The non-Federal entity may self-certify its procurement system.
Such self-certification must not limit the HHS awarding agency's right
to survey the system. Under a self-certification procedure, the HHS
awarding agency may rely on written assurances from the non-Federal
entity that it is complying with these standards. The non-Federal
entity must cite specific policies, procedures, regulations, or
standards as being in compliance with these requirements and have its
system available for review.

Sec.  75.334  Bonding requirements.

    For construction or facility improvement contracts or subcontracts
exceeding the Simplified Acquisition Threshold, the HHS awarding agency
or pass-through entity may accept the bonding policy and requirements
of the non-Federal entity provided that the HHS awarding agency or
pass-through entity has made a determination that the Federal interest
is adequately protected. If such a determination has not been made, the
minimum requirements must be as follows:
    (a) A bid guarantee from each bidder equivalent to five percent of
the bid price. The ``bid guarantee'' must consist of a firm commitment
such as a bid bond, certified check, or other negotiable instrument
accompanying a bid as assurance that the bidder will, upon acceptance
of the bid, execute such contractual documents as may be required
within the time specified.
    (b) A performance bond on the part of the contractor for 100
percent of the contract price. A ``performance bond'' is one executed
in connection with a contract to secure fulfillment of all the
contractor's obligations under such contract.
    (c) A payment bond on the part of the contractor for 100 percent of
the contract price. A ``payment bond'' is one executed in connection
with a contract to assure payment as required by law of all persons
supplying labor and material in the execution of the work provided for
in the contract.
    (d) Where bonds are required in the situations described herein,
the bonds shall be obtained from companies holding certificates of
authority as acceptable sureties pursuant to 31 CFR part 223.

Sec.  75.335  Contract provisions.

    The non-Federal entity's contracts must contain the applicable
provisions described in Appendix II to this part.

Sec.  75.336-Sec.  75.340  [Reserved]

Performance and Financial Monitoring and Reporting

Sec.  75.341  Financial reporting.

    Unless otherwise approved by OMB, the HHS awarding agency may
solicit only the standard, OMB-approved government-wide data elements
for collection of financial information (at time of publication the
Federal Financial Report or such future collections as may be approved
by OMB and listed on the OMB Web site). This information must be
collected with the frequency required by the terms and conditions of
the Federal award, but no less frequently than annually nor more
frequently than quarterly except in unusual circumstances, for example
where more frequent reporting is necessary for the effective monitoring
of the Federal award or could significantly affect program outcomes,
and preferably in coordination with performance reporting.

Sec.  75.342  Monitoring and reporting program performance.

    (a) Monitoring by the non-Federal entity. The non-Federal entity is
responsible for oversight of the operations of the Federal award
supported activities. The non-Federal entity must monitor its
activities under Federal awards to assure compliance with applicable
Federal requirements and performance expectations are being achieved.
Monitoring by the non-Federal entity must cover each program, function
or activity. See also Sec.  75.352.

    (b) Non-construction performance reports. The HHS awarding agency
must use standard, OMB-approved data elements for collection of
performance information (including performance progress reports,
Research Performance Progress Report, or such future collections as may
be approved by OMB and listed on the OMB Web site).
    (1) The non-Federal entity must submit performance reports at the
interval required by the HHS awarding agency or pass-through entity to
best inform improvements in program outcomes and productivity.
Intervals must be no less frequent than annually nor more frequent than
quarterly except in unusual circumstances, for example where more
frequent reporting is necessary for the effective monitoring of the
Federal award or could significantly affect program outcomes. Annual
reports must be due 90 calendar days after the reporting period;
quarterly or semiannual reports must be due 30 calendar days after the
reporting period. Alternatively, the HHS awarding agency or pass-
through entity may require annual reports before the anniversary dates
of multiple year Federal awards. The final performance report will be
due 90 calendar days after the period of performance end date. If a
justified request is submitted by a non-Federal entity, the HHS
awarding agency may extend the due date for any performance report.
    (2) The non-Federal entity must submit performance reports using
OMB-approved government-wide standard information collections when
providing performance information. As appropriate in accordance with
the above-mentioned information collections, these reports will
contain, for each Federal award, brief information on the following
unless other collections are approved by OMB:
    (i) A comparison of actual accomplishments to the objectives of the
Federal award established for the period. Where the accomplishments of
the Federal award can be quantified, a computation of the cost (for
example, related to units of accomplishment) may be required if that
information will be useful. Where performance trend data and analysis
would be informative to the HHS awarding agency program, the HHS
awarding agency should include this as a performance reporting
requirement.
    (ii) The reasons why established goals were not met, if
appropriate.
    (iii) Additional pertinent information including, when appropriate,
analysis and explanation of cost overruns or high unit costs.
    (c) Construction performance reports. For the most part, onsite
technical inspections and certified percentage of completion data are
relied on heavily by HHS awarding agencies and pass-through entities to
monitor progress under Federal awards and subawards for construction.
The HHS awarding agency may require additional performance reports only
when considered necessary.
    (d) Significant developments. Events may occur between the
scheduled performance reporting dates that have significant impact upon
the supported activity. In such cases, the non-Federal entity must
inform the HHS awarding agency or pass-through entity as soon as the
following types of conditions become known:
    (1) Problems, delays, or adverse conditions which will materially
impair the ability to meet the objective of the Federal award. This
disclosure must include a statement of the action taken, or
contemplated, and any assistance needed to resolve the situation.
    (2) Favorable developments which enable meeting time schedules and
objectives sooner or at less cost than anticipated or producing more or
different beneficial results than originally planned.
    (e) The HHS awarding agency may make site visits as warranted by
program needs.
    (f) The HHS awarding agency may waive any performance report
required by this part if not needed.

Sec.  75.343  Reporting on real property.

    The HHS awarding agency or pass-through entity must require a non-
Federal entity to submit reports at least annually on the status of
real property in which the Federal Government retains an interest,
unless the Federal interest in the real property extends 15 years or
longer. In those instances where the Federal interest attached is for a
period of 15 years or more, the HHS awarding agency or pass-through
entity, at its option, may require the non-Federal entity to report at
various multi-year frequencies (e.g., every two years or every three
years, not to exceed a five-year reporting period; or an HHS awarding
agency or pass-through entity may require annual reporting for the
first three years of a Federal award and thereafter require reporting
every five years).

Sec.  75.344-Sec.  75.350  [Reserved]

Subrecipient Monitoring and Management

Sec.  75.351  Subrecipient and contractor determinations.

    The non-Federal entity may concurrently receive Federal awards as a
recipient, a subrecipient, and a contractor, depending on the substance
of its agreements with HHS awarding agencies and pass-through entities.
Therefore, a pass-through entity must make case-by-case determinations
whether each agreement it makes for the disbursement of Federal program
funds casts the party receiving the funds in the role of a subrecipient
or a contractor. The HHS awarding agency may supply and require
recipients to comply with additional guidance to support these
determinations provided such guidance does not conflict with this
section.
    (a) Subrecipients. A subaward is for the purpose of carrying out a
portion of a Federal award and creates a Federal assistance
relationship with the subrecipient. See Sec.  75.2 Subaward.
Characteristics which support the classification of the non-Federal
entity as a subrecipient include when the non-Federal entity:
    (1) Determines who is eligible to receive what Federal assistance;
    (2) Has its performance measured in relation to whether objectives
of a Federal program were met;
    (3) Has responsibility for programmatic decision making;
    (4) Is responsible for adherence to applicable Federal program
requirements specified in the Federal award; and
    (5) In accordance with its agreement, uses the Federal funds to
carry out a program for a public purpose specified in authorizing
statute, as opposed to providing goods or services for the benefit of
the pass-through entity.
    (b) Contractors. A contract is for the purpose of obtaining goods
and services for the non-Federal entity's own use and creates a
procurement relationship with the contractor. See Sec.  75.2 Contract.
Characteristics indicative of a procurement relationship between the
non-Federal entity and a contractor are when the non-Federal entity
receiving the Federal funds:
    (1) Provides the goods and services within normal business
operations;
    (2) Provides similar goods or services to many different
purchasers;
    (3) Normally operates in a competitive environment;
    (4) Provides goods or services that are ancillary to the operation
of the Federal program; and

    (5) Is not subject to compliance requirements of the Federal
program as a result of the agreement, though similar requirements may
apply for other reasons.
    (c) Use of judgment in making determination. In determining whether
an agreement between a pass-through entity and another non-Federal
entity casts the latter as a subrecipient or a contractor, the
substance of the relationship is more important than the form of the
agreement. All of the characteristics listed above may not be present
in all cases, and the pass-through entity must use judgment in
classifying each agreement as a subaward or a procurement contract.

Sec.  75.352  Requirements for pass-through entities.

    All pass-through entities must:
    (a) Ensure that every subaward is clearly identified to the
subrecipient as a subaward and includes the following information at
the time of the subaward and if any of these data elements change,
include the changes in subsequent subaward modification. When some of
this information is not available, the pass-through entity must provide
the best information available to describe the Federal award and
subaward. Required information includes:
    (1) Federal Award Identification.
    (i) Subrecipient name (which must match the name associated with
their unique entity identifier);
    (ii) Subrecipient's unique entity identifier;
    (iii) Federal Award Identification Number (FAIN);
    (iv) Federal Award Date (see Sec.  75.2 Federal award date);
    (v) Subaward Period of Performance Start and End Date;
    (vi) Amount of Federal Funds Obligated by this action;
    (vii) Total Amount of Federal Funds Obligated to the subrecipient;
    (viii) Total Amount of the Federal Award;
    (ix) Federal award project description, as required to be
responsive to the Federal Funding Accountability and Transparency Act
(FFATA);
    (x) Name of HHS awarding agency, pass-through entity, and contact
information for awarding official,
    (xi) CFDA Number and Name; the pass-through entity must identify
the dollar amount made available under each Federal award and the CFDA
number at time of disbursement;
    (xii) Identification of whether the award is R&D and
    (xiii) Indirect cost rate for the Federal award (including if the
de minimis rate is charged per Sec.  75.414).
    (2) All requirements imposed by the pass-through entity on the
subrecipient so that the Federal award is used in accordance with
Federal statutes, regulations and the terms and conditions of the
Federal award.
    (3) Any additional requirements that the pass-through entity
imposes on the subrecipient in order for the pass-through entity to
meet its own responsibility to the HHS awarding agency including
identification of any required financial and performance reports;
    (4) An approved federally recognized indirect cost rate negotiated
between the subrecipient and the Federal Government or, if no such rate
exists, either a rate negotiated between the pass-through entity and
the subrecipient (in compliance with this part), or a de minimis
indirect cost rate as defined in Sec.  75.414(f).
    (5) A requirement that the subrecipient permit the pass-through
entity and auditors to have access to the subrecipient's records and
financial statements as necessary for the pass-through entity to meet
the requirements of this part; and
    (6) Appropriate terms and conditions concerning closeout of the
subaward.
    (b) Evaluate each subrecipient's risk of noncompliance with Federal
statutes, regulations, and the terms and conditions of the subaward for
purposes of determining the appropriate subrecipient monitoring
described in paragraphs (d) and (e) of this section, which may include
consideration of such factors as:
    (1) The subrecipient's prior experience with the same or similar
subawards;
    (2) The results of previous audits including whether or not the
subrecipient receives a Single Audit in accordance with Subpart F, and
the extent to which the same or similar subaward has been audited as a
major program;
    (3) Whether the subrecipient has new personnel or new or
substantially changed systems; and
    (4) The extent and results of HHS awarding agency monitoring (e.g.,
if the subrecipient also receives Federal awards directly from a HHS
awarding agency).
    (c) Consider imposing specific subaward conditions upon a
subrecipient if appropriate as described in Sec.  75.207.
    (d) Monitor the activities of the subrecipient as necessary to
ensure that the subaward is used for authorized purposes, in compliance
with Federal statutes, regulations, and the terms and conditions of the
subaward; and that subaward performance goals are achieved. Pass-
through entity monitoring of the subrecipient must include:
    (1) Reviewing financial and performance reports required by the
pass-through entity.
    (2) Following-up and ensuring that the subrecipient takes timely
and appropriate action on all deficiencies pertaining to the Federal
award provided to the subrecipient from the pass-through entity
detected through audits, on-site reviews, and other means.
    (3) Issuing a management decision for audit findings pertaining to
the Federal award provided to the subrecipient from the pass-through
entity as required by Sec.  75.521.
    (e) Depending upon the pass-through entity's assessment of risk
posed by the subrecipient (as described in paragraph (b) of this
section), the following monitoring tools may be useful for the pass-
through entity to ensure proper accountability and compliance with
program requirements and achievement of performance goals:
    (1) Providing subrecipients with training and technical assistance
on program-related matters; and
    (2) Performing on-site reviews of the subrecipient's program
operations;
    (3) Arranging for agreed-upon-procedures engagements as described
in Sec.  75.425.
    (f) Verify that every subrecipient is audited as required by
Subpart F of this part when it is expected that the subrecipient's
Federal awards expended during the respective fiscal year equaled or
exceeded the threshold set forth in Sec.  75.501.
    (g) Consider whether the results of the subrecipient's audits, on-
site reviews, or other monitoring indicate conditions that necessitate
adjustments to the pass-through entity's own records.
    (h) Consider taking enforcement action against noncompliant
subrecipients as described in Sec.  75.371 and in program regulations.

Sec.  75.353  Fixed amount subawards.

    With prior written approval from the HHS awarding agency, a pass-
through entity may provide subawards based on fixed amounts up to the
Simplified Acquisition Threshold, provided that the subawards meet the
requirements for fixed amount awards in Sec.  75.201.

Sec.  75.354-Sec.  75.360  [Reserved]

Record Retention and Access

Sec.  75.361  Retention requirements for records.

    Financial records, supporting documents, statistical records, and
all

other non-Federal entity records pertinent to a Federal award must be
retained for a period of three years from the date of submission of the
final expenditure report or, for Federal awards that are renewed
quarterly or annually, from the date of the submission of the quarterly
or annual financial report, respectively, as reported to the HHS
awarding agency or pass-through entity in the case of a subrecipient.
HHS awarding agencies and pass-through entities must not impose any
other record retention requirements upon non-Federal entities. The only
exceptions are the following:
    (a) If any litigation, claim, or audit is started before the
expiration of the 3-year period, the records must be retained until all
litigation, claims, or audit findings involving the records have been
resolved and final action taken.
    (b) When the non-Federal entity is notified in writing by the HHS
awarding agency, cognizant agency for audit, oversight agency for
audit, cognizant agency for indirect costs, or pass-through entity to
extend the retention period.
    (c) Records for real property and equipment acquired with Federal
funds must be retained for 3 years after final disposition.
    (d) When records are transferred to or maintained by the HHS
awarding agency or pass-through entity, the 3-year retention
requirement is not applicable to the non-Federal entity.
    (e) Records for program income transactions after the period of
performance. In some cases, recipients must report program income after
the period of performance. Where there is such a requirement, the
retention period for the records pertaining to the earning of the
program income starts from the end of the non-Federal entity's fiscal
year in which the program income is earned.
    (f) Indirect cost rate proposals and cost allocations plans. This
paragraph applies to the following types of documents and their
supporting records: Indirect cost rate computations or proposals, cost
allocation plans, and any similar accounting computations of the rate
at which a particular group of costs is chargeable (such as computer
usage chargeback rates or composite fringe benefit rates).
    (1) If submitted for negotiation. If the proposal, plan, or other
computation is required to be submitted to the Federal Government (or
to the pass-through entity) to form the basis for negotiation of the
rate, then the 3-year retention period for its supporting records
starts from the date of such submission.
    (2) If not submitted for negotiation. If the proposal, plan, or
other computation is not required to be submitted to the Federal
Government (or to the pass-through entity) for negotiation purposes,
then the 3-year retention period for the proposal, plan, or computation
and its supporting records starts from the end of the fiscal year (or
other accounting period) covered by the proposal, plan, or other
computation.

Sec.  75.362  Requests for transfer or records.

    The HHS awarding agency must request transfer of certain records to
its custody from the non-Federal entity when it determines that the
records possess long-term retention value. However, in order to avoid
duplicate recordkeeping, the HHS awarding agency may make arrangements
for the non-Federal entity to retain any records that are continuously
needed for joint use.

Sec.  75.363  Methods for collection, transmission and storage of
information.

    In accordance with Executive Order 13642, the HHS awarding agency
and the non-Federal entity should, whenever practicable, collect,
transmit, and store Federal award-related information in open and
machine readable formats rather than in closed formats or on paper. The
HHS awarding agency or pass-through entity must always provide or
accept paper versions of Federal award-related information to and from
the non-Federal entity upon request. If paper copies are submitted, the
HHS awarding agency or pass-through entity must not require more than
an original and two copies. When original records are electronic and
cannot be altered, there is no need to create and retain paper copies.
When original records are paper, electronic versions may be substituted
through the use of duplication or other forms of electronic media
provided that they are subject to periodic quality control reviews,
provide reasonable safeguards against alteration, and remain readable.

Sec.  75.364  Access to records.

    (a) Records of non-Federal entities. The HHS awarding agency,
Inspectors General, the Comptroller General of the United States, and
the pass-through entity, or any of their authorized representatives,
must have the right of access to any documents, papers, or other
records of the non-Federal entity which are pertinent to the Federal
award, in order to make audits, examinations, excerpts, and
transcripts. The right also includes timely and reasonable access to
the non-Federal entity's personnel for the purpose of interview and
discussion related to such documents.
    (b) Only under extraordinary and rare circumstances would such
access include review of the true name of victims of a crime. Routine
monitoring cannot be considered extraordinary and rare circumstances
that would necessitate access to this information. When access to the
true name of victims of a crime is necessary, appropriate steps to
protect this sensitive information must be taken by both the non-
Federal entity and the HHS awarding agency. Any such access, other than
under a court order or subpoena pursuant to a bona fide confidential
investigation, must be approved by the head of the HHS awarding agency
or delegate.
    (c) Expiration of right of access. The rights of access in this
section are not limited to the required retention period but last as
long as the records are retained. HHS awarding agencies and pass-
through entities must not impose any other access requirements upon
non-Federal entities.

Sec.  75.365  Restrictions on public access to records.

    No HHS awarding agency may place restrictions on the non-Federal
entity that limit public access to the records of the non-Federal
entity pertinent to a Federal award, except for protected personally
identifiable information (PII) or when the HHS awarding agency can
demonstrate that such records will be kept confidential and would have
been exempted from disclosure pursuant to the Freedom of Information
Act (5 U.S.C. 552) or controlled unclassified information pursuant to
Executive Order 13556 if the records had belonged to the HHS awarding
agency. The Freedom of Information Act (5 U.S.C. 552) (FOIA) does not
apply to those records that remain under a non-Federal entity's control
except as required under Sec.  75.322. Unless required by Federal,
state, local, or tribal statute, non-Federal entities are not required
to permit public access to their records. The non-Federal entity's
records provided to a Federal agency generally will be subject to FOIA
and applicable exemptions.

Sec.  75.366-Sec.  75.370  [Reserved]

Remedies for Noncompliance

Sec.  75.371  Remedies for noncompliance.

    If a non-Federal entity fails to comply with Federal statutes,
regulations, or the terms and conditions of a Federal award, the HHS
awarding agency or pass-through entity may impose additional
conditions, as described in Sec.  75.207. If the HHS awarding agency or

pass-through entity determines that noncompliance cannot be remedied by
imposing additional conditions, the HHS awarding agency or pass-through
entity may take one or more of the following actions, as appropriate in
the circumstances:
    (a) Temporarily withhold cash payments pending correction of the
deficiency by the non-Federal entity or more severe enforcement action
by the HHS awarding agency or pass-through entity.
    (b) Disallow (that is, deny both use of funds and any applicable
matching credit for) all or part of the cost of the activity or action
not in compliance.
    (c) Wholly or partly suspend (suspension of award activities) or
terminate the Federal award.
    (d) Initiate suspension or debarment proceedings as authorized
under 2 CFR part 180 and HHS awarding agency regulations at 2 CFR part
376 (or in the case of a pass-through entity, recommend such a
proceeding be initiated by a HHS awarding agency).
    (e) Withhold further Federal awards for the project or program.
    (f) Take other remedies that may be legally available.

Sec.  75.372  Termination.

    (a) The Federal award may be terminated in whole or in part as
follows:
    (1) By the HHS awarding agency or pass-through entity, if a non-
Federal entity fails to comply with terms and conditions of a Federal
award;
    (2) By the HHS awarding agency or pass-through entity for cause;
    (3) By the HHS awarding agency or pass-through entity with the
consent of the non-Federal entity, in which case the two parties must
agree upon the termination conditions, including the effective date
and, in the case of partial termination, the portion to be terminated;
or
    (4) By the non-Federal entity upon sending to the HHS awarding
agency or pass-through entity written notification setting forth the
reasons for such termination, the effective date, and, in the case of
partial termination, the portion to be terminated. However, if the HHS
awarding agency or pass-through entity determines in the case of
partial termination that the reduced or modified portion of the Federal
award or subaward will not accomplish the purposes for which the
Federal award was made, the HHS awarding agency or pass-through entity
may terminate the Federal award in its entirety.
    (b) When a Federal award is terminated or partially terminated,
both the HHS awarding agency or pass-through entity and the non-Federal
entity remain responsible for compliance with the requirements in
Sec. Sec.  75.381and 75.386.

Sec.  75.373  Notification of termination requirement.

    (a) The HHS awarding agency or pass-through entity must provide to
the non-Federal entity a notice of termination.
    (b) If the Federal award is terminated for the non-Federal entity's
failure to comply with the Federal statutes, regulations, or terms and
conditions of the Federal award, the notification must state that the
termination decision may be considered in evaluating future
applications received from the non-Federal entity.
    (c) Upon termination of a Federal award, the HHS awarding agency
must provide the information required under FFATA to the Federal Web
site established to fulfill the requirements of FFATA, and update or
notify any other relevant government-wide systems or entities of any
indications of poor performance as required by 41 U.S.C. 417b and 31
U.S.C. 3321 and implementing guidance at 2 CFR part 77 (forthcoming at
time of publication). See also the requirements for Suspension and
Debarment at 2 CFR part 180.

Sec.  75.374  Opportunities to object, hearings, and appeals.

    (a) Upon taking any remedy for non-compliance, the HHS awarding
agency must provide the non-Federal entity an opportunity to object and
provide information and documentation challenging the suspension or
termination action, in accordance with written processes and procedures
published by the HHS awarding agency. The HHS awarding agency or pass-
through entity must comply with any requirements for hearings, appeals
or other administrative proceedings to which the non-Federal entity is
entitled under any statute or regulation applicable to the action
involved.
    (b) See also:
    (1) 42 CFR part 50, subpart D for the Public Health Service Appeals
Procedures,
    (2) 45 CFR part 16 for the Procedures of the Departmental Appeals
Board, and
    (3) 45 CFR part 95, subpart A for the time limits for states to
file claims.
    (4) 45 CFR part 95, subpart E for the State cost allocation plan
disapprovals.

Sec.  75.375  Effects of suspension and termination.

    Costs to the non-Federal entity resulting from obligations incurred
by the non-Federal entity during a suspension or after termination of a
Federal award or subaward are not allowable unless the HHS awarding
agency or pass-through entity expressly authorizes them in the notice
of suspension or termination or subsequently. However, costs during
suspension or after termination are allowable if:
    (a) The costs result from obligations which were properly incurred
by the non-Federal entity before the effective date of suspension or
termination, are not in anticipation of it; and
    (b) The costs would be allowable if the Federal award was not
suspended or expired normally at the end of the period of performance
in which the termination takes effect.

Sec.  75.376-Sec.  75.380  [Reserved]

Closeout

Sec.  75.381  Closeout.

    The HHS awarding agency or pass-through entity will close-out the
Federal award when it determines that all applicable administrative
actions and all required work of the Federal award have been completed
by the non-Federal entity. This section specifies the actions the non-
Federal entity and HHS awarding agency or pass-through entity must take
to complete this process at the end of the period of performance.
    (a) The non-Federal entity must submit, no later than 90 calendar
days after the end date of the period of performance, all financial,
performance, and other reports as required by the terms and conditions
of the Federal award. The HHS awarding agency or pass-through entity
may approve extensions when requested by the non-Federal entity.
    (b) Unless the HHS awarding agency or pass-through entity
authorizes an extension, a non-Federal entity must liquidate all
obligations incurred under the Federal award not later than 90 calendar
days after the end date of the period of performance as specified in
the terms and conditions of the Federal award.
    (c) The HHS awarding agency or pass-through entity must make prompt
payments to the non-Federal entity for allowable reimbursable costs
under the Federal award being closed out.
    (d) The non-Federal entity must promptly refund any balances of
unobligated cash that the HHS awarding agency or pass-through entity
paid in advance or paid and that are not authorized to be retained by
the non-Federal entity for use in other projects. See OMB Circular A-
129 and see Sec.  75.391 for requirements regarding unreturned amounts
that become delinquent debts.

    (e) Consistent with the terms and conditions of the Federal award,
the HHS awarding agency or pass-through entity must make a settlement
for any upward or downward adjustments to the Federal share of costs
after closeout reports are received.
    (f) The non-Federal entity must account for any real and personal
property acquired with Federal funds or received from the Federal
Government in accordance with Sec. Sec.  75.317 through 75.323 and
75.343.
    (g) The HHS awarding agency or pass-through entity should complete
all closeout actions for Federal awards no later than 180 calendar days
after receipt and acceptance of all required final reports.

Sec.  75.382-Sec.  75.385  [Reserved]

Post-Closeout Adjustments and Continuing Responsibilities

Sec.  75.386  Post-Closeout Adjustments and Continuing
Responsibilities.

    (a) The closeout of a Federal award does not affect any of the
following:
    (1) The right of the HHS awarding agency or pass-through entity to
disallow costs and recover funds on the basis of a later audit or other
review. The HHS awarding agency or pass-through entity must make any
cost disallowance determination and notify the non-Federal entity
within the record retention period.
    (2) The obligation of the non-Federal entity to return any funds
due as a result of later refunds, corrections, or other transactions
including final indirect cost rate adjustments.
    (3) Audit requirements in Subpart F of this part.
    (4) Property management and disposition requirements in Sec. Sec.
75.317 through 75.323.
    (5) Records retention as required in Sec. Sec.  75.361 through
75.365.
    (b) After closeout of the Federal award, a relationship created
under the Federal award may be modified or ended in whole or in part
with the consent of the HHS awarding agency or pass-through entity and
the non-Federal entity, provided the responsibilities of the non-
Federal entity referred to in paragraph (a) of this section, including
those for property management as applicable, are considered and
provisions made for continuing responsibilities of the non-Federal
entity, as appropriate.

Sec.  75.387-Sec.  75.390  [Reserved]

Collection of Amounts Due

Sec.  75.391  Collection of amounts due.

    (a) Any funds paid to the non-Federal entity in excess of the
amount to which the non-Federal entity is finally determined to be
entitled under the terms of the Federal award constitute a debt to the
Federal Government. If not paid within 90 calendar days after demand,
the HHS awarding agency may reduce the debt by:
    (1) Making an administrative offset against other requests for
reimbursements;
    (2) Withholding advance payments otherwise due to the non-Federal
entity; or
    (3) Other action permitted by Federal statute.
    (b) Except where otherwise provided by statutes or regulations, the
HHS awarding agency will charge interest on an overdue debt in
accordance with the Federal Claims Collection Standards (31 CFR parts
900 through 999). The date from which interest is computed is not
extended by litigation or the filing of any form of appeal. (See also
HHS Claims Collection regulations at 45 CFR part 30.)

Subpart E--Cost Principles

General Provisions

Sec.  75.400  Policy guide.

    The application of these cost principles is based on the
fundamental premises that:
    (a) The non-Federal entity is responsible for the efficient and
effective administration of the Federal award through the application
of sound management practices.
    (b) The non-Federal entity assumes responsibility for administering
Federal funds in a manner consistent with underlying agreements,
program objectives, and the terms and conditions of the Federal award.
    (c) The non-Federal entity, in recognition of its own unique
combination of staff, facilities, and experience, has the primary
responsibility for employing whatever form of sound organization and
management techniques may be necessary in order to assure proper and
efficient administration of the Federal-award.
    (d) The application of these cost principles should require no
significant changes in the internal accounting policies and practices
of the non-Federal entity. However, the accounting practices of the
non-Federal entity must be consistent with these cost principles and
support the accumulation of costs as required by the principles, and
must provide for adequate documentation to support costs charged to the
Federal award.
    (e) In reviewing, negotiating and approving cost allocation plans
or indirect cost proposals, the cognizant agency for indirect costs
should generally assure that the non-Federal entity is applying these
cost accounting principles on a consistent basis during their review
and negotiation of indirect cost proposals. Where wide variations exist
in the treatment of a given cost item by the non-Federal entity, the
reasonableness and equity of such treatments should be fully
considered. See Sec.  75.2 Indirect (facilities & administrative (F&A))
costs.
    (f) For non-Federal entities that educate and engage students in
research, the dual role of students as both trainees and employees
(including pre- and post-doctoral staff) contributing to the completion
of Federal awards for research must be recognized in the application of
these principles.
    (g) The non-Federal entity may not earn or keep any profit
resulting from Federal financial assistance, unless explicitly
authorized by the terms and conditions of the Federal award. See also
Sec.  75.307.

Sec.  75.401  Application.

    (a) General. These principles must be used in determining the
allowable costs of work performed by the non-Federal entity under
Federal awards. These principles also must be used by the non-Federal
entity as a guide in the pricing of fixed-price contracts and
subcontracts where costs are used in determining the appropriate price.
The principles do not apply to:
    (1) Arrangements under which Federal financing is in the form of
loans, scholarships, fellowships, traineeships, or other fixed amounts
based on such items as education allowance or published tuition rates
and fees.
    (2) For IHEs, capitation awards, which are awards based on case
counts or number of beneficiaries according to the terms and conditions
of the Federal award.
    (3) Fixed amount awards. See also Sec. Sec.  75.2 Fixed amount
awards and 75.201.
    (4) Federal awards to hospitals (see Appendix IX to Part 75).
    (5) Other awards under which the non-Federal entity is not required
to account to the Federal Government for actual costs incurred.
    (b) Federal Contract. Where a Federal contract awarded to a non-
Federal entity is subject to the Cost Accounting

Standards (CAS), it incorporates the applicable CAS clauses, Standards,
and CAS administration requirements per the 48 CFR Chapter 99 and 48
CFR part 30 (FAR Part 30). CAS applies directly to the CAS-covered
contract and the Cost Accounting Standards at 48 CFR parts 9904 or 9905
takes precedence over the cost principles in this Subpart E with
respect to the allocation of costs. When a contract with a non-Federal
entity is subject to full CAS coverage, the allowability of certain
costs under the cost principles will be affected by the allocation
provisions of the Cost Accounting Standards (e.g., CAS 414-48 CFR
9904.414, and CAS 417-48 CFR 9904.417), apply rather the allowability
provisions of Sec.  75.449. In complying with those requirements, the
non-Federal entity's application of cost accounting practices for
estimating, accumulating, and reporting costs for other Federal awards
and other cost objectives under the CAS-covered contract still must be
consistent with its cost accounting practices for the CAS-covered
contracts. In all cases, only one set of accounting records needs to be
maintained for the allocation of costs by the non-Federal entity.
    (c) Exemptions. Some nonprofit organizations, because of their size
and nature of operations, can be considered to be similar to for-profit
entities for purpose of applicability of cost principles. Such
nonprofit organizations must operate under Federal cost principles
applicable to for-profit entities located at 48 CFR 31.2. A listing of
these organizations is contained in Appendix VIII to Part 75. Other
organizations, as approved by the cognizant agency for indirect costs,
may be added from time to time.

Basic Considerations

Sec.  75.402  Composition of Costs.

    Total cost. The total cost of a Federal award is the sum of the
allowable direct and allocable indirect costs less any applicable
credits.

Sec.  75.403  Factors affecting allowability of costs.

    Except where otherwise authorized by statute, costs must meet the
following general criteria in order to be allowable under Federal
awards:
    (a) Be necessary and reasonable for the performance of the Federal
award and be allocable thereto under these principles.
    (b) Conform to any limitations or exclusions set forth in these
principles or in the Federal award as to types or amount of cost items.
    (c) Be consistent with policies and procedures that apply uniformly
to both federally-financed and other activities of the non-Federal
entity.
    (d) Be accorded consistent treatment. A cost may not be assigned to
a Federal award as a direct cost if any other cost incurred for the
same purpose in like circumstances has been allocated to the Federal
award as an indirect cost.
    (e) Be determined in accordance with generally accepted accounting
principles (GAAP), except, for state and local governments and Indian
tribes only, as otherwise provided for in this part.
    (f) Not be included as a cost or used to meet cost sharing or
matching requirements of any other federally-financed program in either
the current or a prior period. See also Sec.  75.306(b).
    (g) Be adequately documented. See also Sec. Sec.  75.300 through
75.309.

Sec.  75.404  Reasonable costs.

    A cost is reasonable if, in its nature and amount, it does not
exceed that which would be incurred by a prudent person under the
circumstances prevailing at the time the decision was made to incur the
cost. The question of reasonableness is particularly important when the
non-Federal entity is predominantly federally-funded. In determining
reasonableness of a given cost, consideration must be given to:
    (a) Whether the cost is of a type generally recognized as ordinary
and necessary for the operation of the non-Federal entity or the proper
and efficient performance of the Federal award.
    (b) The restraints or requirements imposed by such factors as:
Sound business practices; arm's-length bargaining; Federal, state,
local, tribal, and other laws and regulations; and terms and conditions
of the Federal award.
    (c) Market prices for comparable goods or services for the
geographic area.
    (d) Whether the individuals concerned acted with prudence in the
circumstances considering their responsibilities to the non-Federal
entity, its employees, where applicable its students or membership, the
public at large, and the Federal Government.
    (e) Whether the non-Federal entity significantly deviates from its
established practices and policies regarding the incurrence of costs,
which may unjustifiably increase the Federal award's cost.

Sec.  75.405  Allocable costs.

    (a) A cost is allocable to a particular Federal award or other cost
objective if the goods or services involved are chargeable or
assignable to that Federal award or cost objective in accordance with
relative benefits received. This standard is met if the cost:
    (1) Is incurred specifically for the Federal award;
    (2) Benefits both the Federal award and other work of the non-
Federal entity and can be distributed in proportions that may be
approximated using reasonable methods; and
    (3) Is necessary to the overall operation of the non-Federal entity
and is assignable in part to the Federal award in accordance with the
principles in this subpart.
    (b) All activities which benefit from the non-Federal entity's
indirect (F&A) cost, including unallowable activities and donated
services by the non-Federal entity or third parties, will receive an
appropriate allocation of indirect costs.
    (c) Any cost allocable to a particular Federal award under the
principles provided for in this part may not be charged to other
Federal awards to overcome fund deficiencies, to avoid restrictions
imposed by Federal statutes, regulations, or terms and conditions of
the Federal awards, or for other reasons. However, this prohibition
would not preclude the non-Federal entity from shifting costs that are
allowable under two or more Federal awards in accordance with existing
Federal statutes, regulations, or the terms and conditions of the
Federal awards.
    (d) Direct cost allocation principles. If a cost benefits two or
more projects or activities in proportions that can be determined
without undue effort or cost, the cost must be allocated to the
projects based on the proportional benefit. If a cost benefits two or
more projects or activities in proportions that cannot be determined
because of the interrelationship of the work involved, then,
notwithstanding paragraph (c) of this section, the costs may be
allocated or transferred to benefitted projects on any reasonable
documented basis. Where the purchase of equipment or other capital
asset is specifically authorized under a Federal award, the costs are
assignable to the Federal award regardless of the use that may be made
of the equipment or other capital asset involved when no longer needed
for the purpose for which it was originally required. See also
Sec. Sec.  75.317 through 75.323 and 75.439.
    (e) If the contract is subject to CAS, costs must be allocated to
the contract pursuant to the Cost Accounting Standards. To the extent
that CAS is applicable, the allocation of costs in accordance with CAS
takes precedence over the allocation provisions in this part.

Sec.  75.406  Applicable credits.

    (a) Applicable credits refer to those receipts or reduction-of-
expenditure-type transactions that offset or reduce expense items
allocable to the Federal award as direct or indirect (F&A) costs.
Examples of such transactions are: Purchase discounts, rebates or
allowances, recoveries or indemnities on losses, insurance refunds or
rebates, and adjustments of overpayments or erroneous charges. To the
extent that such credits accruing to or received by the non-Federal
entity relate to allowable costs, they must be credited to the Federal
award either as a cost reduction or cash refund, as appropriate.
    (b) In some instances, the amounts received from the Federal
Government to finance activities or service operations of the non-
Federal entity should be treated as applicable credits. Specifically,
the concept of netting such credit items (including any amounts used to
meet cost sharing or matching requirements) must be recognized in
determining the rates or amounts to be charged to the Federal award.
(See Sec. Sec.  75.436 and 75.468, for areas of potential application
in the matter of Federal financing of activities.)

Sec.  75.407  Prior written approval (prior approval).

    (a) Under any given Federal award, the reasonableness and
allocability of certain items of costs may be difficult to determine.
In order to avoid subsequent disallowance or dispute based on
unreasonableness or non-allocability, the non-Federal entity may seek
the prior written approval of the cognizant agency for indirect costs
or the HHS awarding agency in advance of the incurrence of special or
unusual costs. Prior written approval should include the timeframe or
scope of the agreement. The absence of prior written approval on any
element of cost will not, in itself, affect the reasonableness or
allocability of that element, unless prior approval is specifically
required for allowability as described under certain circumstances in
the following sections of this part:
    (1) Sec.  75.201 Use of grant agreements (including fixed amount
awards), cooperative agreements, and contracts, paragraph (b)(5);
    (2) Sec.  75.306 Cost sharing or matching;
    (3) Sec.  75.307 Program income;
    (4) Sec.  75.308 Revision of budget and program plans;
    (5) Sec.  75.309 Period of performance and availability of funds;
    (6) Sec.  75.318 Real property;
    (7) Sec.  75.320 Equipment;
    (8) Sec.  75.353 Fixed amount subawards;
    (9) Sec.  75.413 Direct costs, paragraph (c);
    (10) Sec.  75.430 Compensation--personal services, paragraph (h);
    (11) Sec.  75.431 Compensation--fringe benefits;
    (12) Sec.  75.438 Entertainment costs;
    (13) Sec.  75.439 Equipment and other capital expenditures;
    (14) Sec.  75.440 Exchange rates;
    (15) Sec.  75.441 Fines, penalties, damages and other settlements;
    (16) Sec.  75.442 Fund raising and investment management costs;
    (17) Sec.  75.445 Goods or services for personal use;
    (18) Sec.  75.447 Insurance and indemnification;
    (19) Sec.  75.454 Memberships, subscriptions, and professional
activity costs, paragraph (c);
    (20) Sec.  75.455 Organization costs;
    (21) Sec.  75.456 Participant support costs;
    (22) Sec.  75.458 Pre-award costs;
    (23) Sec.  75.462 Rearrangement and reconversion costs;
    (24) Sec.  75.467 Selling and marketing costs;
    (25) Sec.  75.470 Taxes (including Value Added Tax) paragraph (c);
and
    (26) Sec.  75.474 Travel costs.
    (b) A request by a subrecipient for prior approval will be
addressed in writing to the recipient. The recipient will promptly
review such request and shall approve or disapprove the request in
writing. A recipient will not approve any budget or project revision
which is inconsistent with the purpose or terms and conditions of the
Federal-award to the recipient. If the revision, requested by the
subrecipient would result in a change to the recipient's approved
project which requires Federal prior approval, the recipient will
obtain the HHS awarding agency's approval before approving the
subrecipient's request.
    (c) For cost-reimbursement contracts under the FAR, the recipient
shall obtain prior written approval in accordance with FAR 52.244-2.

Sec.  75.408  Limitation on allowance of costs.

    The Federal award may be subject to statutory requirements that
limit the allowability of costs. When the maximum amount allowable
under a limitation is less than the total amount determined in
accordance with the principles in this part, the amount not recoverable
under the Federal award may not be charged to the Federal award.

Sec.  75.409  Special considerations.

    In addition to the basic considerations regarding the allowability
of costs highlighted in this subpart, certain sections in this subpart
describe special considerations and requirements applicable to states,
local governments, Indian tribes, and IHEs. In addition, certain
provisions among the items of cost in this subpart are only applicable
to certain types of non-Federal entities, as specified in the following
sections:
    (a) Direct and Indirect (F&A) Costs (Sec. Sec.  75.412 through
75.415);
    (b) Special Considerations for States, Local Governments and Indian
Tribes (Sec. Sec.  75.416 and 75.417); and
    (c) Special Considerations for Institutions of Higher Education
(Sec. Sec.  75.418 and 75.419).

Sec.  75.410  Collection of unallowable costs.

    Payments made for costs determined to be unallowable by either the
HHS awarding agency, cognizant agency for indirect costs, or pass-
through entity, either as direct or indirect costs, must be refunded
(including interest) to the Federal Government in accordance with
instructions from the Federal agency that determined the costs are
unallowable unless Federal statute or regulation directs otherwise. See
also Subpart D of this part, Sec. Sec.  75.300 through 75.309.

Sec.  75.411  Adjustment of previously negotiated indirect (F&A) cost
rates containing unallowable costs.

    (a) Negotiated indirect (F&A) cost rates based on a proposal later
found to have included costs that:
    (1) Are unallowable as specified by Federal statutes, regulations
or the terms and conditions of a Federal award; or
    (2) Are unallowable because they are not allocable to the Federal
award(s), must be adjusted, or a refund must be made, in accordance
with the requirements of this section. These adjustments or refunds are
designed to correct the proposals used to establish the rates and do
not constitute a reopening of the rate negotiation. The adjustments or
refunds will be made regardless of the type of rate negotiated
(predetermined, final, fixed, or provisional).
    (b) For rates covering a future fiscal year of the non-Federal
entity, the unallowable costs will be removed from the indirect (F&A)
cost pools and the rates appropriately adjusted.
    (c) For rates covering a past period, the Federal share of the
unallowable costs will be computed for each year involved and a cash
refund (including interest chargeable in accordance with applicable
regulations) will be made to the Federal Government. If cash refunds
are made for past periods covered by provisional or fixed rates,
appropriate adjustments will be made when the

rates are finalized to avoid duplicate recovery of the unallowable
costs by the Federal Government.
    (d) For rates covering the current period, either a rate adjustment
or a refund, as described in paragraphs (b) and (c) of this section,
must be required by the cognizant agency for indirect costs. The choice
of method must be at the discretion of the cognizant agency for
indirect costs, based on its judgment as to which method would be most
practical.
    (e) The amount or proportion of unallowable costs included in each
year's rate will be assumed to be the same as the amount or proportion
of unallowable costs included in the base year proposal used to
establish the rate.

Direct and Indirect (F&A) Costs

Sec.  75.412  Classification of costs.

    There is no universal rule for classifying certain costs as either
direct or indirect (F&A) under every accounting system. A cost may be
direct with respect to some specific service or function, but indirect
with respect to the Federal award or other final cost objective.
Therefore, it is essential that each item of cost incurred for the same
purpose be treated consistently in like circumstances either as a
direct or an indirect (F&A) cost in order to avoid possible double-
charging of Federal awards. Guidelines for determining direct and
indirect (F&A) costs charged to Federal awards are provided in this
subpart.

Sec.  75.413  Direct costs.

    (a) General. Direct costs are those costs that can be identified
specifically with a particular final cost objective, such as a Federal
award, or other internally or externally funded activity, or that can
be directly assigned to such activities relatively easily with a high
degree of accuracy. Costs incurred for the same purpose in like
circumstances must be treated consistently as either direct or indirect
(F&A) costs. See also Sec.  75.405.
    (b) Application to Federal awards. Identification with the Federal
award rather than the nature of the goods and services involved is the
determining factor in distinguishing direct from indirect (F&A) costs
of Federal awards. Typical costs charged directly to a Federal award
are the compensation of employees who work on that award, their related
fringe benefit costs, the costs of materials and other items of expense
incurred for the Federal award. If directly related to a specific
award, certain costs that otherwise would be treated as indirect costs
may also include extraordinary utility consumption, the cost of
materials supplied from stock or services rendered by specialized
facilities or other institutional service operations.
    (c) The salaries of administrative and clerical staff should
normally be treated as indirect (F&A) costs. Direct charging of these
costs may be appropriate only if all of the following conditions are
met:
    (1) Administrative or clerical services are integral to a project
or activity;
    (2) Individuals involved can be specifically identified with the
project or activity;
    (3) Such costs are explicitly included in the budget or have the
prior written approval of the Federal awarding agency; and
    (4) The costs are not also recovered as indirect costs.
    (d) Minor items. Any direct cost of minor amount may be treated as
an indirect (F&A) cost for reasons of practicality where such
accounting treatment for that item of cost is consistently applied to
all Federal and non-Federal cost objectives.
    (e) The costs of certain activities are not allowable as charges to
Federal awards. However, even though these costs are unallowable for
purposes of computing charges to Federal awards, they nonetheless must
be treated as direct costs for purposes of determining indirect (F&A)
cost rates and be allocated their equitable share of the non-Federal
entity's indirect costs if they represent activities which:
    (1) Include the salaries of personnel,
    (2) Occupy space, and
    (3) Benefit from the non-Federal entity's indirect (F&A) costs.
    (f) For nonprofit organizations, the costs of activities performed
by the non-Federal entity primarily as a service to members, clients,
or the general public when significant and necessary to the non-Federal
entity's mission must be treated as direct costs whether or not
allowable, and be allocated an equitable share of indirect (F&A) costs.
Some examples of these types of activities include:
    (1) Maintenance of membership rolls, subscriptions, publications,
and related functions. See also Sec.  75.454.
    (2) Providing services and information to members, legislative or
administrative bodies, or the public. See also Sec. Sec.  75.454 and
75.450.
    (3) Promotion, lobbying, and other forms of public relations. See
also Sec. Sec.  75.421 and 75.450.
    (4) Conferences except those held to conduct the general
administration of the non-Federal entity. See also Sec.  75.432.
    (5) Maintenance, protection, and investment of special funds not
used in operation of the non-Federal entity. See also Sec.  75.442.
    (6) Administration of group benefits on behalf of members or
clients, including life and hospital insurance, annuity or retirement
plans, and financial aid. See also Sec.  75.431.

Sec.  75.414  Indirect (F&A) costs.

    (a) Facilities and Administration Classification. For major IHEs
and major nonprofit organizations, indirect (F&A) costs must be
classified within two broad categories: ``Facilities'' and
``Administration.'' ``Facilities'' is defined as depreciation on
buildings, equipment and capital improvement, interest on debt
associated with certain buildings, equipment and capital improvements,
and operations and maintenance expenses. ``Administration'' is defined
as general administration and general expenses such as the director's
office, accounting, personnel and all other types of expenditures not
listed specifically under one of the subcategories of ``Facilities''
(including cross allocations from other pools, where applicable). For
nonprofit organizations, library expenses are included in the
``Administration'' category; for institutions of higher education, they
are included in the ``Facilities'' category. Major IHEs are defined as
those required to use the Standard Format for Submission as noted in
Appendix III to Part 75.C. 11. Major nonprofit organizations are those
which receive more than $10 million dollars in direct Federal funding.
    (b) Diversity of nonprofit organizations. Because of the diverse
characteristics and accounting practices of nonprofit organizations, it
is not possible to specify the types of cost which may be classified as
indirect (F&A) cost in all situations. Identification with a Federal
award rather than the nature of the goods and services involved is the
determining factor in distinguishing direct from indirect (F&A) costs
of Federal awards. However, typical examples of indirect (F&A) cost for
many nonprofit organizations may include depreciation on buildings and
equipment, the costs of operating and maintaining facilities, and
general administration and general expenses, such as the salaries and
expenses of executive officers, personnel administration, and
accounting.
    (c) Federal Agency Acceptance of Negotiated Indirect Cost Rates.
(See also Sec.  75.306.)
    (1) The negotiated rates must be accepted by all Federal awarding
agencies. An HHS awarding agency may

use a rate different from the negotiated rate for a class of Federal
awards or a single Federal award only when required by Federal statute
or regulation, or when approved by a Federal awarding agency head or
delegate based on documented justification as described in paragraph
(c)(3) of this section.
    (2) The HHS awarding agency head or delegate must notify OMB of any
approved deviations.
    (3) The HHS awarding agency must implement, and make publicly
available, the policies, procedures and general decision making
criteria that their programs will follow to seek and justify deviations
from negotiated rates.
    (4) As required under Sec.  75.203(c), the HHS awarding agency must
include in the notice of funding opportunity the policies relating to
indirect cost rate reimbursement, matching, or cost share as approved.
See also Appendix I.C.2 and D.6 of this part. As appropriate, the HHS
agency should incorporate discussion of these policies into their
outreach activities with non-Federal entities prior to the posting of a
notice of funding opportunity.
    (d) Pass-through entities are subject to the requirements in Sec.
75.352(a)(4).
    (e) Requirements for development and submission of indirect (F&A)
cost rate proposals and cost allocation plans are contained in
Appendices III-VII, and Appendix IX as follows:
    (1) Appendix III to Part 75--Indirect (F&A) Costs Identification
and Assignment, and Rate Determination for Institutions of Higher
Education (IHEs);
    (2) Appendix IV to Part 75--Indirect (F&A) Costs Identification and
Assignment, and Rate Determination for Nonprofit Organizations;
    (3) Appendix V to Part 75--State/Local Government and Indian Tribe-
Wide Central Service Cost Allocation Plans;
    (4) Appendix VI to Part 75--Public Assistance Cost Allocation
Plans;
    (5) Appendix VII to Part 75--States and Local Government and Indian
Tribe Indirect Cost Proposals; and
    (6) Appendix IX to Part 75--Principles for Determining Costs
Applicable to Research and Development Under Grants and Contracts with
Hospitals.
    (f) In addition to the procedures outlined in the appendices in
paragraph (e) of this section, any non-Federal entity that has never
received a negotiated indirect cost rate, except for those non-Federal
entities described in Appendix VII to part 75 (D)(1)(b) may elect to
charge a de minimis rate of 10% of modified total direct costs (MTDC)
which may be used indefinitely. As described in Sec.  75.403, costs
must be consistently charged as either indirect or direct costs, but
may not be double charged or inconsistently charged as both. If chosen,
this methodology once elected must be used consistently for all Federal
awards until such time as a non-Federal entity chooses to negotiate for
a rate, which the non-Federal entity may apply to do at any time.
    (g) Any non-Federal entity that has a current federally negotiated
indirect cost rate may apply for a one-time extension of the rates in
that agreement for a period of up to four years. This extension will be
subject to the review and approval of the cognizant agency for indirect
costs. If an extension is granted the non-Federal entity may not
request a rate review until the extension period ends. At the end of
the 4-year extension, the non-Federal entity must re-apply to negotiate
a rate. Subsequent one-time extensions (up to four years) are permitted
if a renegotiation is completed between each extension request.

Sec.  75.415  Required certifications.

    Required certifications include:
    (a) To assure that expenditures are proper and in accordance with
the terms and conditions of the Federal award and approved project
budgets, the annual and final fiscal reports or vouchers requesting
payment under the agreements must include a certification, signed by an
official who is authorized to legally bind the non-Federal entity,
which reads as follows: ``By signing this report, I certify to the best
of my knowledge and belief that the report is true, complete, and
accurate, and the expenditures, disbursements and cash receipts are for
the purposes and objectives set forth in the terms and conditions of
the Federal award. I am aware that any false, fictitious, or fraudulent
information, or the omission of any material fact, may subject me to
criminal, civil or administrative penalties for fraud, false
statements, false claims or otherwise. (U.S. Code Title 18, Section
1001 and Title 31, Sections 3729-3730 and 3801-3812).''
    (b) Certification of cost allocation plan or indirect (F&A) cost
rate proposal. Each cost allocation plan or indirect (F&A) cost rate
proposal must comply with the following:
    (1) A proposal to establish a cost allocation plan or an indirect
(F&A) cost rate, whether submitted to a Federal cognizant agency for
indirect costs or maintained on file by the non-Federal entity, must be
certified by the non-Federal entity using the Certificate of Cost
Allocation Plan or Certificate of Indirect Costs as set forth in
Appendices III through VII, and Appendix IX. The certificate must be
signed on behalf of the non-Federal entity by an individual at a level
no lower than vice president or chief financial officer of the non-
Federal entity that submits the proposal.
    (2) Unless the non-Federal entity has elected the option under
Sec.  75.414(f), the Federal Government may either disallow all
indirect (F&A) costs or unilaterally establish such a plan or rate when
the non-Federal entity fails to submit a certified proposal for
establishing such a plan or rate in accordance with the requirements.
Such a plan or rate may be based upon audited historical data or such
other data that have been furnished to the cognizant agency for
indirect costs and for which it can be demonstrated that all
unallowable costs have been excluded. When a cost allocation plan or
indirect cost rate is unilaterally established by the Federal
Government because the non-Federal entity failed to submit a certified
proposal, the plan or rate established will be set to ensure that
potentially unallowable costs will not be reimbursed.
    (c) Certifications by non-profit organizations as appropriate that
they did not meet the definition of a major non-profit organization as
defined in Sec.  75.414(a).
    (d) See also Sec.  75.450 for another required certification.

Special Considerations for States, Local Governments and Indian Tribes

Sec.  75.416  Cost allocation plans and indirect cost proposals.

    (a) For states, local governments and Indian tribes, certain
services, such as motor pools, computer centers, purchasing,
accounting, etc., are provided to operating agencies on a centralized
basis. Since Federal awards are performed within the individual
operating agencies, there needs to be a process whereby these central
service costs can be identified and assigned to benefitted activities
on a reasonable and consistent basis. The central service cost
allocation plan provides that process.
    (b) Individual operating agencies (governmental department or
agency), normally charge Federal awards for indirect costs through an
indirect cost rate. A separate indirect cost rate(s) proposal for each
operating agency is usually necessary to claim indirect costs under
Federal-awards. Indirect costs include:
    (1) The indirect costs originating in each department or agency of
the governmental unit carrying out Federal awards; and
    (2) The costs of central governmental services distributed through
the central

service cost allocation plan and not otherwise treated as direct costs.
    (c) The requirements for development and submission of cost
allocation plans (for central service costs and public assistance
programs) and indirect cost rate proposals are contained in appendices
IV, V and VI to this part.

Sec.  75.417  Interagency service.

    The cost of services provided by one agency to another within the
governmental unit may include allowable direct costs of the service
plus a pro-rated share of indirect costs. A standard indirect cost
allowance equal to ten percent of the direct salary and wage cost of
providing the service (excluding overtime, shift premiums, and fringe
benefits) may be used in lieu of determining the actual indirect costs
of the service. These services do not include centralized services
included in central service cost allocation plans as described in
Appendix V to this part.

Special Considerations for Institutions of Higher Education

Sec.  75.418  Costs incurred by states and local governments.

    Costs incurred or paid by a state or local government on behalf of
its IHEs for fringe benefit programs, such as pension costs and FICA
and any other costs specifically incurred on behalf of, and in direct
benefit to, the IHEs, are allowable costs of such IHEs whether or not
these costs are recorded in the accounting records of the institutions,
subject to the following:
    (a) The costs meet the requirements of Sec. Sec.  75.402 through
75.411;
    (b) The costs are properly supported by approved cost allocation
plans in accordance with applicable Federal cost accounting principles
in this part; and
    (c) The costs are not otherwise borne directly or indirectly by the
Federal Government.

Sec.  75.419  Cost accounting standards and disclosure statement.

    (a) An IHE that receives aggregate Federal awards totaling $50
million or more in Federal awards subject to this part in its most
recently completed fiscal year must comply with the Cost Accounting
Standards Board's cost accounting standards located at 48 CFR 9905.501,
9905.502, 9905.505, and 9905.506. CAS-covered contracts awarded to the
IHEs are subject to the CAS requirements at 48 CFR parts 9900 through
9999 and 48 CFR part 30 (FAR Part 30).
    (b) Disclosure statement. An IHE that receives aggregate Federal
awards totaling $50 million or more subject to this part during its
most recently completed fiscal year must disclose its cost accounting
practices by filing a Disclosure Statement (DS-2), which is reproduced
in Appendix III to part 75. With the approval of the cognizant agency
for indirect costs, an IHE may meet the DS-2 submission by submitting
the DS-2 for each business unit that received $50 million or more in
Federal awards.
    (1) The DS-2 must be submitted to the cognizant agency for indirect
costs with a copy to the IHE's cognizant agency for audit.
    (2) An IHE is responsible for maintaining an accurate DS-2 and
complying with disclosed cost accounting practices. An IHE must file
amendments to the DS-2 to the cognizant agency for indirect costs six
months in advance of a disclosed practice being changed to comply with
a new or modified standard, or when a practice is changed for other
reasons. An IHE may proceed with implementing the change only if it has
not been notified by the Federal cognizant agency for indirect costs
that either a longer period will be needed for review or there are
concerns with the potential change within the six months period.
Amendments of a DS-2 may be submitted at any time. Resubmission of a
complete, updated DS-2 is discouraged except when there are extensive
changes to disclosed practices.
    (3) Cost and funding adjustments. Cost adjustments must be made by
the cognizant agency for indirect costs if an IHE fails to comply with
the cost policies in this part or fails to consistently follow its
established or disclosed cost accounting practices when estimating,
accumulating or reporting the costs of Federal awards, and the
aggregate cost impact on Federal awards is material. The cost
adjustment must normally be made on an aggregate basis for all affected
Federal awards through an adjustment of the IHE's future F&A costs
rates or other means considered appropriate by the cognizant agency for
indirect costs. Under the terms of CAS covered contracts, adjustments
in the amount of funding provided may also be required when the
estimated proposal costs were not determined in accordance with
established cost accounting practices.
    (4) Overpayments. Excess amounts paid in the aggregate by the
Federal Government under Federal awards due to a noncompliant cost
accounting practice used to estimate, accumulate, or report costs must
be credited or refunded, as deemed appropriate by the cognizant agency
for indirect costs. Interest applicable to the excess amounts paid in
the aggregate during the period of noncompliance must also be
determined and collected in accordance with applicable HHS agency
regulations.
    (5) Compliant cost accounting practice changes. Changes from one
compliant cost accounting practice to another compliant practice that
are approved by the cognizant agency for indirect costs may require
cost adjustments if the change has a material effect on Federal awards
and the changes are deemed appropriate by the cognizant agency for
indirect costs.
    (6) Responsibilities. The cognizant agency for indirect cost must:
    (i) Determine cost adjustments for all Federal awards in the
aggregate on behalf of the Federal Government. Actions of the cognizant
agency for indirect cost in making cost adjustment determinations must
be coordinated with all affected HHS awarding agencies to the extent
necessary.
    (ii) Prescribe guidelines and establish internal procedures to
promptly determine on behalf of the Federal Government that a DS-2
adequately discloses the IHE's cost accounting practices and that the
disclosed practices are compliant with applicable CAS and the
requirements of this part.
    (iii) Distribute to all affected Federal awarding agencies any DS-2
determination of adequacy or noncompliance.

General Provisions for Selected Items of Cost

Sec.  75.420  Considerations for selected items of cost.

    This section provides principles to be applied in establishing the
allowability of certain items involved in determining cost, in addition
to the requirements of Sec. Sec.  75.402 through 75.411. These
principles apply whether or not a particular item of cost is properly
treated as direct cost or indirect (F&A) cost. Failure to mention a
particular item of cost is not intended to imply that it is either
allowable or unallowable; rather, determination as to allowability in
each case should be based on the treatment provided for similar or
related items of cost, and based on the principles described in
Sec. Sec.  75.402 through 75.411. In case of a discrepancy between the
provisions of a specific Federal award and the provisions below, the
Federal award governs. Criteria outlined in Sec.  75.403 must be
applied in determining allowability. See also Sec.  75.102.

Sec.  75.421  Advertising and public relations.

    (a) The term advertising costs means the costs of advertising media
and

corollary administrative costs. Advertising media include magazines,
newspapers, radio and television, direct mail, exhibits, electronic or
computer transmittals, and the like.
    (b) The only allowable advertising costs are those which are solely
for:
    (1) The recruitment of personnel required by the non-Federal entity
for performance of a Federal award (See also Sec.  75.463);
    (2) The procurement of goods and services for the performance of a
Federal award;
    (3) The disposal of scrap or surplus materials acquired in the
performance of a Federal award except when non-Federal entities are
reimbursed for disposal costs at a predetermined amount; or
    (4) Program outreach and other specific purposes necessary to meet
the requirements of the Federal award.
    (c) The term ``public relations'' includes community relations and
means those activities dedicated to maintaining the image of the non-
Federal entity or maintaining or promoting understanding and favorable
relations with the community or public at large or any segment of the
public.