academic departments are allowable provided they are treated
consistently in like circumstances. This would include expenses such
as the salaries of secretarial and clerical staffs, the salaries of
administrative officers and assistants, travel, office supplies,
stockrooms, and the like.
    (3) Other fringe benefit costs applicable to the salaries and
wages included in subsections (1) and (2) are allowable, as well as
an appropriate share of general administration and general expenses,
operation and maintenance expenses, and depreciation.
    (4) Federal agencies may authorize reimbursement of additional
costs for department heads and faculty only in exceptional cases
where an institution can demonstrate undue hardship or detriment to
project performance.
    b. The following guidelines apply to the determination of
departmental administrative costs as direct or indirect (F&A) costs.
    (1) In developing the departmental administration cost pool,
special care should be exercised to ensure that costs incurred for
the same purpose in like circumstances are treated consistently as
either direct or indirect (F&A) costs. For example, salaries of
technical staff, laboratory supplies (e.g., chemicals), telephone
toll charges, animals, animal care costs, computer costs, travel
costs, and specialized shop costs must be treated as direct costs
wherever identifiable to a particular cost objective. Direct
charging of these costs may be accomplished through specific
identification of individual costs to benefitting cost objectives,
or through recharge centers or specialized service facilities, as
appropriate under the circumstances. See Sec. Sec.  75.413(c) and
75.468.
    (2) Items such as office supplies, postage, local telephone
costs, and memberships must normally be treated as indirect (F&A)
costs.
    c. In the absence of the alternatives provided for in Section
A.2.d, the expenses included in this category must be allocated as
follows:
    (1) The administrative expenses of the dean's office of each
college and school must be allocated to the academic departments
within that college or school on the modified total cost basis.
    (2) The administrative expenses of each academic department, and
the department's share of the expenses allocated in subsection (1)
must be allocated to the appropriate functions of the department on
the modified total cost basis.

7. Sponsored Projects Administration

    a. The expenses under this heading are limited to those incurred
by a separate organization(s) established primarily to administer
sponsored projects, including such functions as grant and contract
administration (Federal and non-Federal), special security,
purchasing, personnel, administration, and editing and publishing of
research and other reports. They include the salaries and expenses
of the head of such organization, assistants, and immediate staff,
together with the salaries and expenses of personnel engaged in
supporting activities maintained by the organization, such as stock
rooms, print shops, and the like. This category also includes an
allocable share of fringe benefit costs, general administration and
general expenses, operation and maintenance expenses, and
depreciation. Appropriate adjustments will be made for services
provided to other functions or organizations.
    b. In the absence of the alternatives provided for in Section
A.2.d, the expenses included in this category must be allocated to
the major functions of the institution under which the sponsored
projects are conducted on the basis of the modified total cost of
sponsored projects.
    c. An appropriate adjustment must be made to eliminate any
duplicate charges to Federal awards when this category includes
similar or identical activities as those included in the general
administration and general expense category or other indirect (F&A)
cost items, such as accounting, procurement, or personnel
administration.

8. Library Expenses

    a. The expenses under this heading are those that have been
incurred for the operation of the library, including the cost of
books and library materials purchased for the library, less any
items of library income that qualify as applicable credits under
Sec.  75.406. The library expense category should also include the
fringe benefits applicable to the salaries and wages included
therein, an appropriate share of general administration and general
expense, operation and maintenance expense, and depreciation. Costs
incurred in the purchases of rare books (museum-type books) with no
value to Federal awards should not be allocated to them.
    b. In the absence of the alternatives provided for in Section
A.2.d, the expenses included in this category must be allocated
first on the basis of primary categories of users, including
students, professional employees, and other users.
    (1) The student category must consist of full-time equivalent
students enrolled at the institution, regardless of whether they
earn credits toward a degree or certificate.
    (2) The professional employee category must consist of all
faculty members and other professional employees of the institution,
on a full-time equivalent basis. This category may also include
post-doctorate fellows and graduate students.
    (3) The other users category must consist of a reasonable factor
as determined by institutional records to account for all other
users of library facilities.
    c. Amount allocated in paragraph b of this section must be
assigned further as follows:
    (1) The amount in the student category must be assigned to the
instruction function of the institution.
    (2) The amount in the professional employee category must be
assigned to the major functions of the institution in proportion to
the salaries and wages of all faculty members and other professional
employees applicable to those functions.
    (3) The amount in the other users category must be assigned to
the other institutional activities function of the institution.

9. Student Administration and Services

    a. The expenses under this heading are those that have been
incurred for the administration of student affairs and for services
to students, including expenses of such activities as deans of
students, admissions, registrar, counseling and placement services,
student advisers, student health and infirmary services, catalogs,
and commencements and convocations. The salaries of members of the
academic staff whose responsibilities to the institution require
administrative work that benefits sponsored projects may also be
included to the extent that the portion charged to student
administration is determined in accordance with Subpart E of this
part. This expense category also includes the fringe benefit costs
applicable to the salaries and wages included therein, an
appropriate share of general administration and general expenses,
operation and maintenance, interest expense, and depreciation.
    b. In the absence of the alternatives provided for in Section
A.2.d, the expenses in this category must be allocated to the
instruction function, and subsequently to Federal awards in that
function.

10. Offset for Indirect (F&A) Expenses Otherwise Provided for by the
Federal Government

    a. The items to be accumulated under this heading are the
reimbursements and other payments from the Federal Government which
are made to the institution to support solely, specifically, and
directly, in whole or in part, any of the administrative or service
activities described in subsections 2 through 9.
    b. The items in this group must be treated as a credit to the
affected individual indirect (F&A) cost category before that
category is allocated to benefitting functions.

C. Determination and Application of Indirect (F&A) Cost Rate or Rates

1. Indirect (F&A) Cost Pools

    a. (1) Subject to subsection b, the separate categories of
indirect (F&A) costs allocated to each major function of the
institution as prescribed in Section B of this paragraph C.1-, must
be aggregated and treated as a common pool for that function. The
amount in each pool must be divided by the distribution base
described in subsection 2 to

arrive at a single indirect (F&A) cost rate for each function.
    (2) The rate for each function is used to distribute indirect
(F&A) costs to individual Federal awards of that function. Since a
common pool is established for each major function of the
institution, a separate indirect (F&A) cost rate would be
established for each of the major functions described in Section A.1
under which Federal awards are carried out.
    (3) Each institution's indirect (F&A) cost rate process must be
appropriately designed to ensure that Federal sponsors do not in any
way subsidize the indirect (F&A) costs of other sponsors,
specifically activities sponsored by industry and foreign
governments. Accordingly, each allocation method used to identify
and allocate the indirect (F&A) cost pools, as described in Sections
A.2, and B.2 through B.9, must contain the full amount of the
institution's modified total costs or other appropriate units of
measurement used to make the computations. In addition, the final
rate distribution base (as defined in subsection 2) for each major
function (organized research, instruction, etc., as described in
Section A.1) must contain all the programs or activities which
utilize the indirect (F&A) costs allocated to that major function.
At the time an indirect (F&A) cost proposal is submitted to a
cognizant agency for indirect costs, each institution must describe
the process it uses to ensure that Federal funds are not used to
subsidize industry and foreign government funded programs.
    b. In some instances a single rate basis for use across the
board on all work within a major function at an institution may not
be appropriate. A single rate for research, for example, might not
take into account those different environmental factors and other
conditions which may affect substantially the indirect (F&A) costs
applicable to a particular segment of research at the institution. A
particular segment of research may be that performed under a single
sponsored agreement or it may consist of research under a group of
Federal awards performed in a common environment. The environmental
factors are not limited to the physical location of the work. Other
important factors are the level of the administrative support
required, the nature of the facilities or other resources employed,
the scientific disciplines or technical skills involved, the
organizational arrangements used, or any combination thereof. If a
particular segment of a sponsored agreement is performed within an
environment which appears to generate a significantly different
level of indirect (F&A) costs, provisions should be made for a
separate indirect (F&A) cost pool applicable to such work. The
separate indirect (F&A) cost pool should be developed during the
regular course of the rate determination process and the separate
indirect (F&A) cost rate resulting therefrom should be utilized;
provided it is determined that (1) such indirect (F&A) cost rate
differs significantly from that which would have been obtained under
subsection a, and (2) the volume of work to which such rate would
apply is material in relation to other Federal awards at the
institution.

2. The Distribution Basis

    Indirect (F&A) costs must be distributed to applicable Federal
awards and other benefitting activities within each major function
(see section A.1, Major functions of an institution) on the basis of
modified total direct costs (MTDC), consisting of all salaries and
wages, fringe benefits, materials and supplies, services, travel,
and up to the first $25,000 of each subaward (regardless of the
period covered by the subaward). MTDC is defined in Sec.  75.2. For
this purpose, an indirect (F&A) cost rate should be determined for
each of the separate indirect (F&A) cost pools developed pursuant to
subsection 1. The rate in each case should be stated as the
percentage which the amount of the particular indirect (F&A) cost
pool is of the modified total direct costs identified with such
pool.

3. Negotiated Lump Sum for Indirect (F&A) Costs

    A negotiated fixed amount in lieu of indirect (F&A) costs may be
appropriate for self-contained, off-campus, or primarily
subcontracted activities where the benefits derived from an
institution's indirect (F&A) services cannot be readily determined.
Such negotiated indirect (F&A) costs will be treated as an offset
before allocation to instruction, organized research, other
sponsored activities, and other institutional activities. The base
on which such remaining expenses are allocated should be
appropriately adjusted.

4. Predetermined Rates for Indirect (F&A) Costs

    Public Law 87-638 (76 Stat. 437) as amended (41 U.S.C. 4708)
authorizes the use of predetermined rates in determining the
``indirect costs'' (indirect (F&A) costs) applicable under research
agreements with educational institutions. The stated objectives of
the law are to simplify the administration of cost-type research and
development contracts (including grants) with educational
institutions, to facilitate the preparation of their budgets, and to
permit more expeditious closeout of such contracts when the work is
completed. In view of the potential advantages offered by this
procedure, negotiation of predetermined rates for indirect (F&A)
costs for a period of two to four years should be the norm in those
situations where the cost experience and other pertinent facts
available are deemed sufficient to enable the parties involved to
reach an informed judgment as to the probable level of indirect
(F&A) costs during the ensuing accounting periods.

5. Negotiated Fixed Rates and Carry-Forward Provisions

    When a fixed rate is negotiated in advance for a fiscal year (or
other time period), the over- or under-recovery for that year may be
included as an adjustment to the indirect (F&A) cost for the next
rate negotiation. When the rate is negotiated before the carry-
forward adjustment is determined, the carry-forward amount may be
applied to the next subsequent rate negotiation. When such
adjustments are to be made, each fixed rate negotiated in advance
for a given period will be computed by applying the expected
indirect (F&A) costs allocable to Federal awards for the forecast
period plus or minus the carry-forward adjustment (over- or under-
recovery) from the prior period, to the forecast distribution base.
Unrecovered amounts under lump-sum agreements or cost-sharing
provisions of prior years must not be carried forward for
consideration in the new rate negotiation. There must, however, be
an advance understanding in each case between the institution and
the cognizant agency for indirect costs as to whether these
differences will be considered in the rate negotiation rather than
making the determination after the differences are known. Further,
institutions electing to use this carry-forward provision may not
subsequently change without prior approval of the cognizant agency
for indirect costs. In the event that an institution returns to a
post-determined rate, any over- or under-recovery during the period
in which negotiated fixed rates and carry-forward provisions were
followed will be included in the subsequent post-determined rates.
Where multiple rates are used, the same procedure will be applicable
for determining each rate.

6. Provisional and Final Rates for Indirect (F&A) Costs

    Where the cognizant agency for indirect costs determines that
cost experience and other pertinent facts do not justify the use of
predetermined rates, or a fixed rate with a carry-forward, or if the
parties cannot agree on an equitable rate, a provisional rate must
be established. To prevent substantial overpayment or underpayment,
the provisional rate may be adjusted by the cognizant agency for
indirect costs during the institution's fiscal year. Predetermined
or fixed rates may replace provisional rates at any time prior to
the close of the institution's fiscal year. If a provisional rate is
not replaced by a predetermined or fixed rate prior to the end of
the institution's fiscal year, a final rate will be established and
upward or downward adjustments will be made based on the actual
allowable costs incurred for the period involved.

7. Fixed Rates for the Life of the Sponsored Agreement

    a. Except as provided in paragraph (c)(1) of Sec.  75.414
Federal agencies must use the negotiated rates for indirect (F&A)
costs in effect at the time of the initial award throughout the life
of the Federal award. Award levels for Federal awards may not be
adjusted in future years as a result of changes in negotiated rates.
``Negotiated rates'' per the rate agreement include final, fixed,
and predetermined rates and exclude provisional rates. ``Life'' for
the purpose of this subsection means each competitive segment of a
project. A competitive segment is a period of years approved by the
Federal awarding agency at the time of the Federal award. If
negotiated rate agreements do not extend through the life of the
Federal award at the time of the initial award, then the negotiated
rate for the last year of the Federal award must be extended through
the end of the life of the Federal award.
    b. Except as provided in Sec.  75.414, when an educational
institution does not have a negotiated rate with the Federal
Government

at the time of an award (because the educational institution is a
new recipient or the parties cannot reach agreement on a rate), the
provisional rate used at the time of the award must be adjusted once
a rate is negotiated and approved by the cognizant agency for
indirect costs.

8. Limitation on Reimbursement of Administrative Costs

    a. Notwithstanding the provisions of subsection C.1.a, the
administrative costs charged to Federal awards awarded or amended
(including continuation and renewal awards) with effective dates
beginning on or after the start of the institution's first fiscal
year which begins on or after October 1, 1991, must be limited to
26% of modified total direct costs (as defined in subsection 2) for
the total of General Administration and General Expenses,
Departmental Administration, Sponsored Projects Administration, and
Student Administration and Services (including their allocable share
of depreciation, interest costs, operation and maintenance expenses,
and fringe benefits costs, as provided by Section B, Identification
and assignment of indirect (F&A) costs, and all other types of
expenditures not listed specifically under one of the subcategories
of facilities in Section B.
    b. Institutions should not change their accounting or cost
allocation methods if the effect is to change the charging of a
particular type of cost from F&A to direct, or to reclassify costs,
or increase allocations from the administrative pools identified in
paragraph B.1 of this Appendix to the other F&A cost pools or fringe
benefits. Cognizant agencies for indirect cost are authorized to
allow changes where an institution's charging practices are at
variance with acceptable practices followed by a substantial
majority of other institutions.

9. Alternative Method for Administrative Costs

    a. Notwithstanding the provisions of subsection C.1.a, an
institution may elect to claim a fixed allowance for the
``Administration'' portion of indirect (F&A) costs. The allowance
could be either 24% of modified total direct costs or a percentage
equal to 95% of the most recently negotiated fixed or predetermined
rate for the cost pools included under ``Administration'' as defined
in Section B.1, whichever is less. Under this alternative, no cost
proposal need be prepared for the ``Administration'' portion of the
indirect (F&A) cost rate nor is further identification or
documentation of these costs required (see subsection c). Where a
negotiated indirect (F&A) cost agreement includes this alternative,
an institution must make no further charges for the expenditure
categories described in Section B.5, Section B.6, Section B.7, and
Section B.9.
    b. In negotiations of rates for subsequent periods, an
institution that has elected the option of subsection a may continue
to exercise it at the same rate without further identification or
documentation of costs.
    c. If an institution elects to accept a threshold rate as
defined in subsection a of this section, it is not required to
perform a detailed analysis of its administrative costs. However, in
order to compute the facilities components of its indirect (F&A)
cost rate, the institution must reconcile its indirect (F&A) cost
proposal to its financial statements and make appropriate
adjustments and reclassifications to identify the costs of each
major function as defined in Section A.1, as well as to identify and
allocate the facilities components. Administrative costs that are
not identified as such by the institution's accounting system (such
as those incurred in academic departments) will be classified as
instructional costs for purposes of reconciling indirect (F&A) cost
proposals to financial statements and allocating facilities costs.

10. Individual Rate Components

    In order to provide mutually agreed-upon information for
management purposes, each indirect (F&A) cost rate negotiation or
determination must include development of a rate for each indirect
(F&A) cost pool as well as the overall indirect (F&A) cost rate.

11. Negotiation and Approval of Indirect (F&A) Rate

    a. Cognizant agency for indirect costs is defined in Sec.  75.2.
    (1) Cost negotiation cognizance is assigned to the Department of
Health and Human Services (HHS) or the Department of Defense's
Office of Naval Research (DOD), normally depending on which of the
two agencies (HHS or DOD) provides more funds to the educational
institution for the most recent three years. Information on funding
must be derived from relevant data gathered by the National Science
Foundation. In cases where neither HHS nor DOD provides Federal
funding to an educational institution, the cognizant agency for
indirect costs assignment must default to HHS. Notwithstanding the
method for cognizance determination described in this section, other
arrangements for cognizance of a particular educational institution
may also be based in part on the types of research performed at the
educational institution and must be decided based on mutual
agreement between HHS and DOD. Where a non-Federal entity only
receives funds as a subrecipient, see the requirements of Sec.
75.352.
    (2) After cognizance is established, it must continue for a
five-year period.
    b. Acceptance of rates. See Sec.  75.414.
    c. Correcting deficiencies. The cognizant agency for indirect
costs must negotiate changes needed to correct systems deficiencies
relating to accountability for Federal awards. Cognizant agencies
for indirect costs must address the concerns of other affected
agencies, as appropriate, and must negotiate special rates for
Federal agencies that are required to limit recovery of indirect
costs by statute.
    d. Resolving questioned costs. The cognizant agency for indirect
costs must conduct any necessary negotiations with an educational
institution regarding amounts questioned by audit that are due the
Federal Government related to costs covered by a negotiated
agreement.
    e. Reimbursement. Reimbursement to cognizant agencies for
indirect costs for work performed under this Part may be made by
reimbursement billing under the Economy Act, 31 U.S.C. 1535.
    f. Procedure for establishing facilities and administrative
rates must be established by one of the following methods:
    (1) Formal negotiation. The cognizant agency for indirect costs
is responsible for negotiating and approving rates for an
educational institution on behalf of all Federal agencies. Federal
awarding agencies that do not have cognizance for indirect costs
must notify the cognizant agency for indirect costs of specific
concerns (i.e., a need to establish special cost rates) which could
affect the negotiation process. The cognizant agency for indirect
costs must address the concerns of all interested agencies, as
appropriate. A pre-negotiation conference may be scheduled among all
interested agencies, if necessary. The cognizant agency for indirect
costs must then arrange a negotiation conference with the
educational institution.
    (2) Other than formal negotiation. The cognizant agency for
indirect costs and educational institution may reach an agreement on
rates without a formal negotiation conference; for example, through
correspondence or use of the simplified method described in this
section D of this Appendix.
    g. Formalizing determinations and agreements. The cognizant
agency for indirect costs must formalize all determinations or
agreements reached with an educational institution and provide
copies to other agencies having an interest. Determinations should
include a description of any adjustments, the actual amount, both
dollar and percentage adjusted, and the reason for making
adjustments.
    h. Disputes and disagreements. Where the cognizant agency for
indirect costs is unable to reach agreement with an educational
institution with regard to rates or audit resolution, the appeal
system of the cognizant agency for indirect costs must be followed
for resolution of the disagreement.

12. Standard Format for Submission

    For facilities and administrative (indirect (F&A)) rate
proposals, educational institutions must use the standard format,
shown in section E of this appendix, to submit their indirect (F&A)
rate proposal to the cognizant agency for indirect costs. The
cognizant agency for indirect costs may, on an institution-by-
institution basis, grant exceptions from all or portions of Part II
of the standard format requirement. This requirement does not apply
to educational institutions that use the simplified method for
calculating indirect (F&A) rates, as described in Section D of this
Appendix.
    As provided in section C.10, each F&A cost rate negotiation or
determination must include development of a rate for each F&A cost
pool as well as the overall F&A rate.

D. Simplified Method for Small Institutions

1. General

    a. Where the total direct cost of work covered by this part 75
at an institution does not exceed $10 million in a fiscal year, the
simplified procedure described in subsections 2 or 3 may be used in

determining allowable indirect (F&A) costs. Under this simplified
procedure, the institution's most recent annual financial report and
immediately available supporting information must be utilized as a
basis for determining the indirect (F&A) cost rate applicable to all
Federal awards. The institution may use either the salaries and
wages (see subsection 2) or modified total direct costs (see
subsection 3) as the distribution basis.
    b. The simplified procedure should not be used where it produces
results which appear inequitable to the Federal Government or the
institution. In any such case, indirect (F&A) costs should be
determined through use of the regular procedure.

2. Simplified Procedure--Salaries and Wages Base

    a. Establish the total amount of salaries and wages paid to all
employees of the institution.
    b. Establish an indirect (F&A) cost pool consisting of the
expenditures (exclusive of capital items and other costs
specifically identified as unallowable) which customarily are
classified under the following titles or their equivalents:
    (1) General administration and general expenses (exclusive of
costs of student administration and services, student activities,
student aid, and scholarships).
    (2) Operation and maintenance of physical plant and depreciation
(after appropriate adjustment for costs applicable to other
institutional activities).
    (3) Library.
    (4) Department administration expenses, which will be computed
as 20 percent of the salaries and expenses of deans and heads of
departments.
    In those cases where expenditures classified under subsection
(1) have previously been allocated to other institutional
activities, they may be included in the indirect (F&A) cost pool.
The total amount of salaries and wages included in the indirect
(F&A) cost pool must be separately identified.
    c. Establish a salary and wage distribution base, determined by
deducting from the total of salaries and wages as established in
subsection a. from the amount of salaries and wages included under
subsection b.
    d. Establish the indirect (F&A) cost rate, determined by
dividing the amount in the indirect (F&A) cost pool, subsection b,
by the amount of the distribution base, subsection c.
    e. Apply the indirect (F&A) cost rate to direct salaries and
wages for individual agreements to determine the amount of indirect
(F&A) costs allocable to such agreements.

3. Simplified Procedure--Modified Total Direct Cost Base

    a. Establish the total costs incurred by the institution for the
base period.
    b. Establish an indirect (F&A) cost pool consisting of the
expenditures (exclusive of capital items and other costs
specifically identified as unallowable) which customarily are
classified under the following titles or their equivalents:
    (1) General administration and general expenses (exclusive of
costs of student administration and services, student activities,
student aid, and scholarships).
    (2) Operation and maintenance of physical plant and depreciation
(after appropriate adjustment for costs applicable to other
institutional activities).
    (3) Library.
    (4) Department administration expenses, which will be computed
as 20 percent of the salaries and expenses of deans and heads of
departments. In those cases where expenditures classified under
subsection (1) have previously been allocated to other institutional
activities, they may be included in the indirect (F&A) cost pool.
The modified total direct costs amount included in the indirect
(F&A) cost pool must be separately identified.
    c. Establish a modified total direct cost distribution base, as
defined in Section C.2, that consists of all institution's direct
functions.
    d. Establish the indirect (F&A) cost rate, determined by
dividing the amount in the indirect (F&A) cost pool, subsection b,
by the amount of the distribution base, subsection c.
    e. Apply the indirect (F&A) cost rate to the modified total
direct costs for individual agreements to determine the amount of
indirect (F&A) costs allocable to such agreements.

E. Documentation Requirements

    The standard format for documentation requirements for indirect
(indirect (F&A)) rate proposals for claiming costs under the regular
method is available on the OMB Web site here: http://www.whitehouse.gov/omb/grants_forms.

F. Certification

1. Certification of Charges

    To assure that expenditures for Federal awards are proper and in
accordance with the agreement documents and approved project
budgets, the annual and/or final fiscal reports or vouchers
requesting payment under the agreements will include a
certification, signed by an authorized official of the university,
which reads ``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 intent set forth in the award documents. 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 3729-3733 and 3801-3812)''.

2. Certification of Indirect (F&A) Costs

    a. Policy. Cognizant agencies must not accept a proposed
indirect cost rate unless such costs have been certified by the
educational institution using the Certificate of indirect (F&A)
Costs set forth in subsection F.2.c
    b. The certificate must be signed on behalf of the institution
by the chief financial officer or an individual designated by an
individual at a level no lower than vice president or chief
financial officer.
    An indirect (F&A) cost rate is not binding upon the Federal
Government if the most recent required proposal from the institution
has not been certified. Where it is necessary to establish indirect
(F&A) cost rates, and the institution has not submitted a certified
proposal for establishing such rates in accordance with the
requirements of this section, the Federal Government must
unilaterally establish such rates. Such rates 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
indirect (F&A) cost rates are unilaterally established by the
Federal Government because of failure of the institution to submit a
certified proposal for establishing such rates in accordance with
this section, the rates established will be set at a level low
enough to ensure that potentially unallowable costs will not be
reimbursed.
    c. Certificate. The certificate required by this section must be
in the following form:

Certificate of Indirect (F&A) Costs

    This is to certify that to the best of my knowledge and belief:
    (1) I have reviewed the indirect (F&A) cost proposal submitted
herewith;
    (2) All costs included in this proposal [identify date] to
establish billing or final indirect (F&A) costs rate for [identify
period covered by rate] are allowable in accordance with the
requirements of the Federal agreement(s) to which they apply and
with the cost principles applicable to those agreements.
    (3) This proposal does not include any costs which are
unallowable under applicable cost principles such as (without
limitation): public relations costs, contributions and donations,
entertainment costs, fines and penalties, lobbying costs, and
defense of fraud proceedings; and
    (4) All costs included in this proposal are properly allocable
to Federal agreements on the basis of a beneficial or causal
relationship between the expenses incurred and the agreements to
which they are allocated in accordance with applicable requirements.
    I declare that the foregoing is true and correct.
    Institution of Higher Education:
    Signature:
    Name of Official:
    Title:
    Date of Execution:

Appendix IV to Part 75--Indirect (F&A) Costs Identification and
Assignment, and Rate Determination for Nonprofit Organizations

A. General

    1. Indirect costs are those that have been incurred for common
or joint objectives and cannot be readily identified with a
particular final cost objective. Direct cost of minor amounts may be
treated as indirect costs under the conditions described in Sec.
75.413(d). After direct costs have been determined and assigned
directly to awards or other work as appropriate, indirect costs are
those remaining to be allocated to benefitting cost objectives. A
cost may not be

allocated to a Federal award as an indirect cost if any other cost
incurred for the same purpose, in like circumstances, has been
assigned to a Federal award as a direct cost.
    ``Major nonprofit organizations'' are defined in Sec.  75.414.
See indirect cost rate reporting requirements in sections B.2.e and
B.3.g of this Appendix.

B. Allocation of Indirect Costs and Determination of Indirect Cost
Rates

1. General

    a. If a nonprofit organization has only one major function, or
where all its major functions benefit from its indirect costs to
approximately the same degree, the allocation of indirect costs and
the computation of an indirect cost rate may be accomplished through
simplified allocation procedures, as described in section B.2 of
this Appendix.
    b. If an organization has several major functions which benefit
from its indirect costs in varying degrees, allocation of indirect
costs may require the accumulation of such costs into separate cost
groupings which then are allocated individually to benefitting
functions by means of a base which best measures the relative degree
of benefit. The indirect costs allocated to each function are then
distributed to individual Federal awards and other activities
included in that function by means of an indirect cost rate(s).
    c. The determination of what constitutes an organization's major
functions will depend on its purpose in being; the types of services
it renders to the public, its clients, and its members; and the
amount of effort it devotes to such activities as fundraising,
public information and membership activities.
    d. Specific methods for allocating indirect costs and computing
indirect cost rates along with the conditions under which each
method should be used are described in section B.2 through B.5 of
this Appendix.
    e. The base period for the allocation of indirect costs is the
period in which such costs are incurred and accumulated for
allocation to work performed in that period. The base period
normally should coincide with the organization's fiscal year but, in
any event, must be so selected as to avoid inequities in the
allocation of the costs.

2. Simplified Allocation Method

    a. Where an organization's major functions benefit from its
indirect costs to approximately the same degree, the allocation of
indirect costs may be accomplished by (i) separating the
organization's total costs for the base period as either direct or
indirect, and (ii) dividing the total allowable indirect costs (net
of applicable credits) by an equitable distribution base. The result
of this process is an indirect cost rate which is used to distribute
indirect costs to individual Federal awards. The rate should be
expressed as the percentage which the total amount of allowable
indirect costs bears to the base selected. This method should also
be used where an organization has only one major function
encompassing a number of individual projects or activities, and may
be used where the level of Federal awards to an organization is
relatively small.
    b. Both the direct costs and the indirect costs must exclude
capital expenditures and unallowable costs. However, unallowable
costs which represent activities must be included in the direct
costs under the conditions described in Sec.  75.413(e).
    c. The distribution base may be total direct costs (excluding
capital expenditures and other distorting items, such contracts or
subawards for $25,000 or more), direct salaries and wages, or other
base which results in an equitable distribution. The distribution
base must exclude participant support costs as defined in Sec.
75.2.
    d. Except where a special rate(s) is required in accordance with
section B.5 of this Appendix, the indirect cost rate developed under
the above principles is applicable to all Federal awards of the
organization. If a special rate(s) is required, appropriate
modifications must be made in order to develop the special rate(s).
    e. For an organization that receives more than $10 million in
Federal funding of direct costs in a fiscal year, a breakout of the
indirect cost component into two broad categories, Facilities and
Administration as defined in section A.3 of this Appendix, is
required. The rate in each case must be stated as the percentage
which the amount of the particular indirect cost category (i.e.,
Facilities or Administration) is of the distribution base identified
with that category.

3. Multiple Allocation Base Method

    a. General. Where an organization's indirect costs benefit its
major functions in varying degrees, indirect costs must be
accumulated into separate cost groupings, as described in
subparagraph b. Each grouping must then be allocated individually to
benefitting functions by means of a base which best measures the
relative benefits. The default allocation bases by cost pool are
described in section B.3.c of this Appendix.
    b. Identification of indirect costs. Cost groupings must be
established so as to permit the allocation of each grouping on the
basis of benefits provided to the major functions. Each grouping
must constitute a pool of expenses that are of like character in
terms of functions they benefit and in terms of the allocation base
which best measures the relative benefits provided to each function.
The groupings are classified within the two broad categories:
``Facilities'' and ``Administration,'' as described in section A.3
of this Appendix. The indirect cost pools are defined as follows:
    (1) Depreciation. The expenses under this heading are the
portion of the costs of the organization's buildings, capital
improvements to land and buildings, and equipment which are computed
in accordance with Sec.  75.436 .
    (2) Interest. Interest on debt associated with certain
buildings, equipment and capital improvements are computed in
accordance with Sec.  75.449.
    (3) Operation and maintenance expenses. The expenses under this
heading are those that have been incurred for the administration,
operation, maintenance, preservation, and protection of the
organization's physical plant. They include expenses normally
incurred for such items as: janitorial and utility services; repairs
and ordinary or normal alterations of buildings, furniture and
equipment; care of grounds; maintenance and operation of buildings
and other plant facilities; security; earthquake and disaster
preparedness; environmental safety; hazardous waste disposal;
property, liability and other insurance relating to property; space
and capital leasing; facility planning and management; and central
receiving. The operation and maintenance expenses category must also
include its allocable share of fringe benefit costs, depreciation,
and interest costs.
    (4) General administration and general expenses. The expenses
under this heading are those that have been incurred for the overall
general executive and administrative offices of the organization and
other expenses of a general nature which do not relate solely to any
major function of the organization. This category must also include
its allocable share of fringe benefit costs, operation and
maintenance expense, depreciation, and interest costs. Examples of
this category include central offices, such as the director's
office, the office of finance, business services, budget and
planning, personnel, safety and risk management, general counsel,
management information systems, and library costs.
    In developing this cost pool, special care should be exercised
to ensure that costs incurred for the same purpose in like
circumstances are treated consistently as either direct or indirect
costs. For example, salaries of technical staff, project supplies,
project publication, telephone toll charges, computer costs, travel
costs, and specialized services costs must be treated as direct
costs wherever identifiable to a particular program. The salaries
and wages of administrative and pooled clerical staff should
normally be treated as indirect costs. Direct charging of these
costs may be appropriate as described in Sec.  75.413. Items such as
office supplies, postage, local telephone costs, periodicals and
memberships should normally be treated as indirect costs.
    c. Allocation bases. Actual conditions must be taken into
account in selecting the base to be used in allocating the expenses
in each grouping to benefitting functions. The essential
consideration in selecting a method or a base is that it is the one
best suited for assigning the pool of costs to cost objectives in
accordance with benefits derived; a traceable cause and effect
relationship; or logic and reason, where neither the cause nor the
effect of the relationship is determinable. When an allocation can
be made by assignment of a cost grouping directly to the function
benefitted, the allocation must be made in that manner. When the
expenses in a cost grouping are more general in nature, the
allocation must be made through the use of a selected base which
produces results that are equitable to both the Federal Government
and the organization. The distribution must be made in accordance
with the bases described herein unless it can be demonstrated that
the use of a different base would result in a more equitable
allocation of the costs, or that a more readily available base would
not increase the costs charged to Federal awards. The results of
special cost

studies (such as an engineering utility study) must not be used to
determine and allocate the indirect costs to Federal awards.
    (1) Depreciation. Depreciation expenses must be allocated in the
following manner:
    (a) Depreciation on buildings used exclusively in the conduct of
a single function, and on capital improvements and equipment used in
such buildings, must be assigned to that function.
    (b) Depreciation on buildings used for more than one function,
and on capital improvements and equipment used in such buildings,
must be allocated to the individual functions performed in each
building on the basis of usable square feet of space, excluding
common areas, such as hallways, stairwells, and restrooms.
    (c) Depreciation on buildings, capital improvements and
equipment related space (e.g., individual rooms, and laboratories)
used jointly by more than one function (as determined by the users
of the space) must be treated as follows. The cost of each jointly
used unit of space must be allocated to the benefitting functions on
the basis of:
    (i) the employees and other users on a full-time equivalent
(FTE) basis or salaries and wages of those individual functions
benefitting from the use of that space; or
    (ii) organization-wide employee FTEs or salaries and wages
applicable to the benefitting functions of the organization.
    (d) Depreciation on certain capital improvements to land, such
as paved parking areas, fences, sidewalks, and the like, not
included in the cost of buildings, must be allocated to user
categories on a FTE basis and distributed to major functions in
proportion to the salaries and wages of all employees applicable to
the functions.
    (2) Interest. Interest costs must be allocated in the same
manner as the depreciation on the buildings, equipment and capital
equipment to which the interest relates.
    (3) Operation and maintenance expenses. Operation and
maintenance expenses must be allocated in the same manner as the
depreciation.
    (4) General administration and general expenses. General
administration and general expenses must be allocated to benefitting
functions based on modified total costs (MTC). The MTC is the
modified total direct costs (MTDC), as described in Sec.  75.2, plus
the allocated indirect cost proportion. The expenses included in
this category could be grouped first according to major functions of
the organization to which they render services or provide benefits.
The aggregate expenses of each group must then be allocated to
benefitting functions based on MTC.
    d. Order of distribution.
    (1) Indirect cost categories consisting of depreciation,
interest, operation and maintenance, and general administration and
general expenses must be allocated in that order to the remaining
indirect cost categories as well as to the major functions of the
organization. Other cost categories should be allocated in the order
determined to be most appropriate by the organization. This order of
allocation does not apply if cross allocation of costs is made as
provided in section B.3.d.2 of this Appendix.
    (2) Normally, an indirect cost category will be considered
closed once it has been allocated to other cost objectives, and
costs must not be subsequently allocated to it. However, a cross
allocation of costs between two or more indirect costs categories
could be used if such allocation will result in a more equitable
allocation of costs. If a cross allocation is used, an appropriate
modification to the composition of the indirect cost categories is
required.
    e. Application of indirect cost rate or rates. Except where a
special indirect cost rate(s) is required in accordance with section
B.5 of this Appendix, the separate groupings of indirect costs
allocated to each major function must be aggregated and treated as a
common pool for that function. The costs in the common pool must
then be distributed to individual Federal awards included in that
function by use of a single indirect cost rate.
    f. Distribution basis. Indirect costs must be distributed to
applicable Federal awards and other benefitting activities within
each major function on the basis of MTDC (see definition in Sec.
75.2).
    g. Individual Rate Components. An indirect cost rate must be
determined for each separate indirect cost pool developed. The rate
in each case must be stated as the percentage which the amount of
the particular indirect cost pool is of the distribution base
identified with that pool. Each indirect cost rate negotiation or
determination agreement must include development of the rate for
each indirect cost pool as well as the overall indirect cost rate.
The indirect cost pools must be classified within two broad
categories: ``Facilities'' and ``Administration,'' as described in
section A.3 of this Appendix.

4. Direct Allocation Method

    a. Some nonprofit organizations treat all costs as direct costs
except general administration and general expenses. These
organizations generally separate their costs into three basic
categories: (i) General administration and general expenses, (ii)
fundraising, and (iii) other direct functions (including projects
performed under Federal awards). Joint costs, such as depreciation,
rental costs, operation and maintenance of facilities, telephone
expenses, and the like are prorated individually as direct costs to
each category and to each Federal award or other activity using a
base most appropriate to the particular cost being prorated.
    b. This method is acceptable, provided each joint cost is
prorated using a base which accurately measures the benefits
provided to each Federal award or other activity. The bases must be
established in accordance with reasonable criteria, and be supported
by current data. This method is compatible with the Standards of
Accounting and Financial Reporting for Voluntary Health and Welfare
Organizations issued jointly by the National Health Council, Inc.,
the National Assembly of Voluntary Health and Social Welfare
Organizations, and the United Way of America.
    c. Under this method, indirect costs consist exclusively of
general administration and general expenses. In all other respects,
the organization's indirect cost rates must be computed in the same
manner as that described in section B.2 of this Appendix.

5. Special Indirect Cost Rates

    In some instances, a single indirect cost rate for all
activities of an organization or for each major function of the
organization may not be appropriate, since it would not take into
account those different factors which may substantially affect the
indirect costs applicable to a particular segment of work. For this
purpose, a particular segment of work may be that performed under a
single Federal award or it may consist of work under a group of
Federal awards performed in a common environment. These factors may
include the physical location of the work, the level of
administrative support required, the nature of the facilities or
other resources employed, the scientific disciplines or technical
skills involved, the organizational arrangements used, or any
combination thereof. When a particular segment of work is performed
in an environment which appears to generate a significantly
different level of indirect costs, provisions should be made for a
separate indirect cost pool applicable to such work. The separate
indirect cost pool should be developed during the course of the
regular allocation process, and the separate indirect cost rate
resulting therefrom should be used, provided it is determined that
(i) the rate differs significantly from that which would have been
obtained under sections B.2, B.3, and B.4 of this Appendix, and (ii)
the volume of work to which the rate would apply is material.

C. Negotiation and Approval of Indirect Cost Rates

1. Definitions

    As used in this section, the following terms have the meanings
set forth in this section:
    a. Cognizant agency for indirect costs means the Federal agency
responsible for negotiating and approving indirect cost rates for a
nonprofit organization on behalf of all Federal agencies.
    b. Predetermined rate means an indirect cost rate, applicable to
a specified current or future period, usually the organization's
fiscal year. The rate is based on an estimate of the costs to be
incurred during the period. A predetermined rate is not subject to
adjustment.
    c. Fixed rate means an indirect cost rate which has the same
characteristics as a predetermined rate, except that the difference
between the estimated costs and the actual costs of the period
covered by the rate is carried forward as an adjustment to the rate
computation of a subsequent period.
    d. Final rate means an indirect cost rate applicable to a
specified past period which is based on the actual costs of the
period. A final rate is not subject to adjustment.
    e. Provisional rate or billing rate means a temporary indirect
cost rate applicable to a specified period which is used for
funding, interim reimbursement, and reporting indirect costs on
Federal awards pending the establishment of a final rate for the
period.
    f. Indirect cost proposal means the documentation prepared by an
organization to substantiate its claim for the

reimbursement of indirect costs. This proposal provides the basis
for the review and negotiation leading to the establishment of an
organization's indirect cost rate.
    g. Cost objective means a function, organizational subdivision,
contract, Federal award, or other work unit for which cost data are
desired and for which provision is made to accumulate and measure
the cost of processes, projects, jobs and capitalized projects.

2. Negotiation and Approval of Rates

    a. Unless different arrangements are agreed to by the Federal
agencies concerned, the Federal agency with the largest dollar value
of Federal awards with an organization will be designated as the
cognizant agency for indirect costs for the negotiation and approval
of the indirect cost rates and, where necessary, other rates such as
fringe benefit and computer charge-out rates. Once an agency is
assigned cognizance for a particular nonprofit organization, the
assignment will not be changed unless there is a shift in the dollar
volume of the Federal awards to the organization for at least three
years. All concerned Federal agencies must be given the opportunity
to participate in the negotiation process but, after a rate has been
agreed upon, it will be accepted by all Federal agencies. When a
Federal agency has reason to believe that special operating factors
affecting its Federal awards necessitate special indirect cost rates
in accordance with section B.5 of this Appendix, it will, prior to
the time the rates are negotiated, notify the cognizant agency for
indirect costs. (See also Sec.  75.414.) Where a non-Federal entity
only receives funds as a subrecipient, see the requirements of Sec.
75.352.
    b. Except as otherwise provided in Sec.  75.414(e), a nonprofit
organization which has not previously established an indirect cost
rate with a Federal agency must submit its initial indirect cost
proposal immediately after the organization is advised that a
Federal award will be made and, in no event, later than three months
after the effective date of the Federal award.
    c. Unless approved by the cognizant agency for indirect costs in
accordance with Sec.  75.414(f), organizations that have previously
established indirect cost rates must submit a new indirect cost
proposal to the cognizant agency for indirect costs within six
months after the close of each fiscal year.
    d. A predetermined rate may be negotiated for use on Federal
awards where there is reasonable assurance, based on past experience
and reliable projection of the organization's costs, that the rate
is not likely to exceed a rate based on the organization's actual
costs.
    e. Fixed rates may be negotiated where predetermined rates are
not considered appropriate. A fixed rate, however, must not be
negotiated if (i) all or a substantial portion of the organization's
Federal awards are expected to expire before the carry-forward
adjustment can be made; (ii) the mix of Federal and non-Federal work
at the organization is too erratic to permit an equitable carry-
forward adjustment; or (iii) the organization's operations fluctuate
significantly from year to year.
    f. Provisional and final rates must be negotiated where neither
predetermined nor fixed rates are appropriate. Predetermined or
fixed rates may replace provisional rates at any time prior to the
close of the organization's fiscal year. If that event does not
occur, a final rate will be established and upward or downward
adjustments will be made based on the actual allowable costs
incurred for the period involved.
    g. The results of each negotiation must be formalized in a
written agreement between the cognizant agency for indirect costs
and the nonprofit organization. The cognizant agency for indirect
costs must make available copies of the agreement to all concerned
Federal agencies.
    h. If a dispute arises in a negotiation of an indirect cost rate
between the cognizant agency for indirect costs and the nonprofit
organization, the dispute must be resolved in accordance with the
appeals procedures of the cognizant agency for indirect costs.
    i. To the extent that problems are encountered among the Federal
agencies in connection with the negotiation and approval process,
OMB will lend assistance as required to resolve such problems in a
timely manner.

D. Certification of Indirect (F&A) Costs

    1. Required Certification. No proposal to establish indirect
(F&A) cost rates must be acceptable unless such costs have been
certified by the non-profit organization using the Certificate of
Indirect (F&A) Costs set forth in subsection b., below. The
certificate must be signed on behalf of the organization by an
individual at a level no lower than vice president or chief
financial officer for the organization.
    2. Certificate. Each indirect cost rate proposal must be
accompanied by a certification in the following form:
    Certificate of Indirect (F&A) Costs
    This is to certify that to the best of my knowledge and belief:
    (1) I have reviewed the indirect (F&A) cost proposal submitted
herewith;
    (2) All costs included in this proposal [identify date] to
establish billing or final indirect (F&A) costs rate for [identify
period covered by rate] are allowable in accordance with the
requirements of the Federal awards to which they apply and with
Subpart E of part 75.
    (3) This proposal does not include any costs which are
unallowable under Subpart E of part 75 such as (without limitation):
public relations costs, contributions and donations, entertainment
costs, fines and penalties, lobbying costs, and defense of fraud
proceedings; and
    (4) All costs included in this proposal are properly allocable
to Federal awards on the basis of a beneficial or causal
relationship between the expenses incurred and the Federal awards to
which they are allocated in accordance with applicable requirements.
    I declare that the foregoing is true and correct.
Nonprofit Organization:
Signature:
Name of Official:
Title:
Date of Execution:

Appendix V to Part 75--State/Local Governmentwide Central Service Cost
Allocation Plans

A. General

    1. Most governmental units provide certain services, such as
motor pools, computer centers, purchasing, accounting, etc., to
operating agencies on a centralized basis. Since federally-supported
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. All costs and other data used to distribute the costs
included in the plan should be supported by formal accounting and
other records that will support the propriety of the costs assigned
to Federal awards.
    2. Guidelines and illustrations of central service cost
allocation plans are provided in a brochure published by the
Department of Health and Human Services entitled ``A Guide for
State, Local and Indian Tribal Governments: Cost Principles and
Procedures for Developing Cost Allocation Plans and Indirect Cost
Rates for Agreements with the Federal Government.'' A copy of this
brochure may be obtained from the HHS' Cost Allocation Services at
https://rates.psc.gov.

B. Definitions

    1. Agency or operating agency means an organizational unit or
sub-division within a governmental unit that is responsible for the
performance or administration of Federal awards or activities of the
governmental unit.
    2. Allocated central services means central services that
benefit operating agencies but are not billed to the agencies on a
fee-for-service or similar basis. These costs are allocated to
benefitted agencies on some reasonable basis. Examples of such
services might include general accounting, personnel administration,
purchasing, etc.
    3. Billed central services means central services that are
billed to benefitted agencies or programs on an individual fee-for-
service or similar basis. Typical examples of billed central
services include computer services, transportation services,
insurance, and fringe benefits.
    4. Cognizant agency for indirect costs is defined in Sec.  75.2.
The determination of cognizant agency for indirect costs for states
and local governments is described in section F.1.
    5. Major local government means local government that receives
more than $100 million in direct Federal awards subject to this
part.

C. Scope of the Central Service Cost Allocation Plans

    The central service cost allocation plan will include all
central service costs that will be claimed (either as a billed or an
allocated cost) under Federal awards and will be documented as
described in section E. Costs of central services omitted from the
plan will not be reimbursed.

D. Submission Requirements

    1. Each state will submit a plan to the Department of Health and
Human Services for each year in which it claims central service
costs under Federal awards. The plan should include (a) a projection
of the next year's allocated central service cost (based either on
actual costs for the most recently completed year or the budget
projection for the coming year), and (b) a reconciliation of actual
allocated central service costs to the estimated costs used for
either the most recently completed year or the year immediately
preceding the most recently completed year.
    2. Each major local government is also required to submit a plan
to its cognizant agency for indirect costs annually.
    3. All other local governments claiming central service costs
must develop a plan in accordance with the requirements described in
this Part and maintain the plan and related supporting documentation
for audit. These local governments are not required to submit their
plans for Federal approval unless they are specifically requested to
do so by the cognizant agency for indirect costs. Where a local
government only receives funds as a subrecipient, the pass-through
entity will be responsible for monitoring the subrecipient's plan.
    4. All central service cost allocation plans will be prepared
and, when required, submitted within six months prior to the
beginning of each of the governmental unit's fiscal years in which
it proposes to claim central service costs. Extensions may be
granted by the cognizant agency for indirect costs on a case-by-case
basis.

E. Documentation Requirements for Submitted Plans

    The documentation requirements described in this section may be
modified, expanded, or reduced by the cognizant agency for indirect
costs on a case-by-case basis. For example, the requirements may be
reduced for those central services which have little or no impact on
Federal awards. Conversely, if a review of a plan indicates that
certain additional information is needed, and will likely be needed
in future years, it may be routinely requested in future plan
submissions. Items marked with an asterisk (*) should be submitted
only once; subsequent plans should merely indicate any changes since
the last plan.

1. General

    All proposed plans must be accompanied by the following: An
organization chart sufficiently detailed to show operations
including the central service activities of the state/local
government whether or not they are shown as benefitting from central
service functions; a copy of the Comprehensive Annual Financial
Report (or a copy of the Executive Budget if budgeted costs are
being proposed) to support the allowable costs of each central
service activity included in the plan; and, a certification (see
subsection 4.) that the plan was prepared in accordance with this
Part, contains only allowable costs, and was prepared in a manner
that treated similar costs consistently among the various Federal
awards and between Federal and non-Federal awards/activities.

2. Allocated Central Services

    For each allocated central service, the plan must also include
the following: A brief description of the service,* an
identification of the unit rendering the service and the operating
agencies receiving the service, the items of expense included in the
cost of the service, the method used to distribute the cost of the
service to benefitted agencies, and a summary schedule showing the
allocation of each service to the specific benefitted agencies. If
any self-insurance funds or fringe benefits costs are treated as
allocated (rather than billed) central services, documentation
discussed in subsections 3.b. and c. must also be included.

3. Billed Services

    a. General. The information described in this section must be
provided for all billed central services, including internal service
funds, self-insurance funds, and fringe benefit funds.
    b. Internal service funds.
    (1) For each internal service fund or similar activity with an
operating budget of $5 million or more, the plan must include: A
brief description of each service; a balance sheet for each fund
based on individual accounts contained in the governmental unit's
accounting system; a revenue/expenses statement, with revenues
broken out by source, e.g., regular billings, interest earned, etc.;
a listing of all non-operating transfers (as defined by Generally
Accepted Accounting Principles (GAAP)) into and out of the fund; a
description of the procedures (methodology) used to charge the costs
of each service to users, including how billing rates are
determined; a schedule of current rates; and, a schedule comparing
total revenues (including imputed revenues) generated by the service
to the allowable costs of the service, as determined under this
Part, with an explanation of how variances will be handled.
    (2) Revenues must consist of all revenues generated by the
service, including unbilled and uncollected revenues. If some users
were not billed for the services (or were not billed at the full
rate for that class of users), a schedule showing the full imputed
revenues associated with these users must be provided. Expenses must
be broken out by object cost categories (e.g., salaries, supplies,
etc.).
    c. Self-insurance funds. For each self-insurance fund, the plan
must include: The fund balance sheet; a statement of revenue and
expenses including a summary of billings and claims paid by agency;
a listing of all non-operating transfers into and out of the fund;
the type(s) of risk(s) covered by the fund (e.g., automobile
liability, workers' compensation, etc.); an explanation of how the
level of fund contributions are determined, including a copy of the
current actuarial report (with the actuarial assumptions used) if
the contributions are determined on an actuarial basis; and, a
description of the procedures used to charge or allocate fund
contributions to benefitted activities. Reserve levels in excess of
claims (1) submitted and adjudicated but not paid, (2) submitted but
not adjudicated, and (3) incurred but not submitted must be
identified and explained.
    d. Fringe benefits. For fringe benefit costs, the plan must
include: A listing of fringe benefits provided to covered employees,
and the overall annual cost of each type of benefit; current fringe
benefit policies; and procedures used to charge or allocate the
costs of the benefits to benefitted activities. In addition, for
pension and post-retirement health insurance plans, the following
information must be provided: the governmental unit's funding
policies, e.g., legislative bills, trust agreements, or state-
mandated contribution rules, if different from actuarially
determined rates; the pension plan's costs accrued for the year; the
amount funded, and date(s) of funding; a copy of the current
actuarial report (including the actuarial assumptions); the plan
trustee's report; and, a schedule from the activity showing the
value of the interest cost associated with late funding.

4. Required Certification

    Each central service cost allocation plan will be accompanied by
a certification in the following form:

Certificate of Cost Allocation Plan

    This is to certify that I have reviewed the cost allocation plan
submitted herewith and to the best of my knowledge and belief:
    (1) All costs included in this proposal [identify date] to
establish cost allocations or billings for [identify period covered
by plan] are allowable in accordance with the requirements of this
Part and the Federal award(s) to which they apply. Unallowable costs
have been adjusted for in allocating costs as indicated in the cost
allocation plan.
    (2) All costs included in this proposal are properly allocable
to Federal awards on the basis of a beneficial or causal
relationship between the expenses incurred and the Federal awards to
which they are allocated in accordance with applicable requirements.
Further, the same costs that have been treated as indirect costs
have not been claimed as direct costs. Similar types of costs have
been accounted for consistently.
    I declare that the foregoing is true and correct.
Governmental Unit:
Signature:
Name of Official:
Title:
Date of Execution:

F. Negotiation and Approval of Central Service Plans

1. Federal Cognizant Agency for Indirect Costs Assignments for Cost
Negotiation

    In general, unless different arrangements are agreed to by the
concerned Federal agencies, for central service cost allocation
plans, the cognizant agency responsible for review and approval is
the Federal agency with the largest dollar value of total Federal
awards with a governmental unit. For indirect cost rates and
departmental indirect cost allocation plans, the cognizant agency is
the Federal agency with the largest dollar value of direct Federal
awards with a governmental unit or component, as appropriate. Once
designated as the cognizant agency for indirect costs, the Federal
agency must remain so for a period of five years. In addition, the
following

Federal agencies continue to be responsible for the indicated
governmental entities:
    Department of Health and Human Services--Public assistance and
state-wide cost allocation plans for all states (including the
District of Columbia and Puerto Rico), state and local hospitals,
libraries and health districts.
    Department of the Interior--Indian tribal governments,
territorial governments, and state and local park and recreational
districts.
    Department of Labor--State and local labor departments.
    Department of Education--School districts and state and local
education agencies.
    Department of Agriculture--State and local agriculture
departments.
    Department of Transportation--State and local airport and port
authorities and transit districts.
    Department of Commerce--State and local economic development
districts.
    Department of Housing and Urban Development--State and local
housing and development districts.
    Environmental Protection Agency--State and local water and sewer
districts.

2. Review

    All proposed central service cost allocation plans that are
required to be submitted will be reviewed, negotiated, and approved
by the cognizant agency for indirect costs on a timely basis. The
cognizant agency for indirect costs will review the proposal within
six months of receipt of the proposal and either negotiate/approve
the proposal or advise the governmental unit of the additional
documentation needed to support/evaluate the proposed plan or the
changes required to make the proposal acceptable. Once an agreement
with the governmental unit has been reached, the agreement will be
accepted and used by all Federal agencies, unless prohibited or
limited by statute. Where a Federal awarding agency has reason to
believe that special operating factors affecting its Federal awards
necessitate special consideration, the funding agency will, prior to
the time the plans are negotiated, notify the cognizant agency for
indirect costs.

3. Agreement

    The results of each negotiation must be formalized in a written
agreement between the cognizant agency for indirect costs and the
governmental unit. This agreement will be subject to re-opening if
the agreement is subsequently found to violate a statute or the
information upon which the plan was negotiated is later found to be
materially incomplete or inaccurate. The results of the negotiation
must be made available to all Federal agencies for their use.

4. Adjustments

    Negotiated cost allocation plans based on a proposal later found
to have included costs that: (a) Are unallowable (i) as specified by
law or regulation, (ii) as identified in subpart F, General
Provisions for selected Items of Cost of this Part, or (iii) by the
terms and conditions of Federal awards, or (b) are unallowable
because they are clearly not allocable to Federal awards, must be
adjusted, or a refund must be made at the option of the cognizant
agency for indirect costs, including earned or imputed interest from
the date of transfer and debt interest, if applicable, chargeable in
accordance with applicable Federal cognizant agency for indirect
costs regulations. Adjustments or cash refunds may include, at the
option of the cognizant agency for indirect costs, earned or imputed
interest from the date of expenditure and delinquent debt interest,
if applicable, chargeable in accordance with applicable cognizant
agency claims collection regulations. These adjustments or refunds
are designed to correct the plans and do not constitute a reopening
of the negotiation.

G. Other Policies

1. Billed Central Service Activities

    Each billed central service activity must separately account for
all revenues (including imputed revenues) generated by the service,
expenses incurred to furnish the service, and profit/loss.

2. Working Capital Reserves

    Internal service funds are dependent upon a reasonable level of
working capital reserve to operate from one billing cycle to the
next. Charges by an internal service activity to provide for the
establishment and maintenance of a reasonable level of working
capital reserve, in addition to the full recovery of costs, are
allowable. A working capital reserve as part of retained earnings of
up to 60 calendar days cash expenses for normal operating purposes
is considered reasonable. A working capital reserve exceeding 60
calendar days may be approved by the cognizant agency for indirect
costs in exceptional cases.

3. Carry-Forward Adjustments of Allocated Central Service Costs

    Allocated central service costs are usually negotiated and
approved for a future fiscal year on a ``fixed with carry-forward''
basis. Under this procedure, the fixed amounts for the future year
covered by agreement are not subject to adjustment for that year.
However, when the actual costs of the year involved become known,
the differences between the fixed amounts previously approved and
the actual costs will be carried forward and used as an adjustment
to the fixed amounts established for a later year. This ``carry-
forward'' procedure applies to all central services whose costs were
fixed in the approved plan. However, a carry-forward adjustment is
not permitted, for a central service activity that was not included
in the approved plan, or for unallowable costs that must be
reimbursed immediately.

4. Adjustments of Billed Central Services

    Billing rates used to charge Federal awards must be based on the
estimated costs of providing the services, including an estimate of
the allocable central service costs. A comparison of the revenue
generated by each billed service (including total revenues whether
or not billed or collected) to the actual allowable costs of the
service will be made at least annually, and an adjustment will be
made for the difference between the revenue and the allowable costs.
These adjustments will be made through one of the following
adjustment methods: (a) A cash refund including earned or imputed
interest from the date of transfer and debt interest, if applicable,
chargeable in accordance with applicable Federal cognizant agency
for indirect costs regulations to the Federal Government for the
Federal share of the adjustment, (b) credits to the amounts charged
to the individual programs, (c) adjustments to future billing rates,
or (d) adjustments to allocated central service costs. Adjustments
to allocated central services will not be permitted where the total
amount of the adjustment for a particular service (Federal share and
non-Federal) share exceeds $500,000. Adjustment methods may include,
at the option of the cognizant agency, earned or imputed interest
from the date of expenditure and delinquent debt interest, if
applicable, chargeable in accordance with applicable cognizant
agency claims collection regulations.

5. Records Retention

    All central service cost allocation plans and related
documentation used as a basis for claiming costs under Federal
awards must be retained for audit in accordance with the records
retention requirements contained in Subpart D of part 75.

6. Appeals

    If a dispute arises in the negotiation of a plan between the
cognizant agency for indirect costs and the governmental unit, the
dispute must be resolved in accordance with the appeals procedures
of the cognizant agency for indirect costs.

7. OMB Assistance

    To the extent that problems are encountered among the Federal
agencies or governmental units in connection with the negotiation
and approval process, OMB will lend assistance, as required, to
resolve such problems in a timely manner.

Appendix VI to Part 75--Public Assistance Cost Allocation Plans

A. General

    Federally-financed programs administered by state public
assistance agencies are funded predominately by the Department of
Health and Human Services (HHS). In support of its stewardship
requirements, HHS has published requirements for the development,
documentation, submission, negotiation, and approval of public
assistance cost allocation plans in Subpart E of 45 CFR part 95. All
administrative costs (direct and indirect) are normally charged to
Federal awards by implementing the public assistance cost allocation
plan. This Appendix extends these requirements to all Federal
awarding agencies whose programs are administered by a state public
assistance agency. Major federally-financed programs typically
administered by state public assistance agencies include: Temporary
Aid for Needy Families (TANF), Medicaid, Food Stamps, Child Support
Enforcement, Adoption Assistance and Foster Care, and Social
Services Block Grant.

B. Definitions

    1. State public assistance agency means a state agency
administering or supervising the

administration of one or more public assistance programs operated by
the state as identified in Subpart E of 45 CFR part 95. For the
purpose of this Appendix, these programs include all programs
administered by the state public assistance agency.
    2. State public assistance agency costs means all costs incurred
by, or allocable to, the state public assistance agency, except
expenditures for financial assistance, medical contractor payments,
food stamps, and payments for services and goods provided directly
to program recipients.

C. Policy

    State public assistance agencies will develop, document and
implement, and the Federal Government will review, negotiate, and
approve, public assistance cost allocation plans in accordance with
Subpart E of 45 CFR part 95. The plan will include all programs
administered by the state public assistance agency. Where a letter
of approval or disapproval is transmitted to a state public
assistance agency in accordance with Subpart E, the letter will
apply to all Federal agencies and programs. The remaining sections
of this Appendix (except for the requirement for certification)
summarize the provisions of Subpart E of 45 CFR part 95.

D. Submission, Documentation, and Approval of Public Assistance Cost
Allocation Plans

    1. State public assistance agencies are required to promptly
submit amendments to the cost allocation plan to HHS for review and
approval.
    2. Under the coordination process outlined in section E, Review
of Implementation of Approved Plans, affected Federal agencies will
review all new plans and plan amendments and provide comments, as
appropriate, to HHS. The effective date of the plan or plan
amendment will be the first day of the calendar quarter following
the event that required the amendment, unless another date is
specifically approved by HHS. HHS, as the cognizant agency for
indirect costs acting on behalf of all affected Federal agencies,
will, as necessary, conduct negotiations with the state public
assistance agency and will inform the state agency of the action
taken on the plan or plan amendment.

E. Review of Implementation of Approved Plans

    1. Since public assistance cost allocation plans are of a
narrative nature, the review during the plan approval process
consists of evaluating the appropriateness of the proposed groupings
of costs (cost centers) and the related allocation bases. As such,
the Federal Government needs some assurance that the cost allocation
plan has been implemented as approved. This is accomplished by
reviews by the Federal awarding agencies, single audits, or audits
conducted by the cognizant agency for indirect costs.
    2. Where inappropriate charges affecting more than one Federal
awarding agency are identified, the cognizant HHS cost negotiation
office will be advised and will take the lead in resolving the
issue(s) as provided for in Subpart E of 45 CFR part 95.
    3. If a dispute arises in the negotiation of a plan or from a
disallowance involving two or more Federal awarding agencies, the
dispute must be resolved in accordance with the appeals procedures
set out in 45 CFR part 16. Disputes involving only one Federal
awarding agency will be resolved in accordance with the Federal
awarding agency's appeal process.
    4. To the extent that problems are encountered among the Federal
awarding agencies or governmental units in connection with the
negotiation and approval process, the Office of Management and
Budget will lend assistance, as required, to resolve such problems
in a timely manner.

F. Unallowable Costs

    Claims developed under approved cost allocation plans will be
based on allowable costs as identified in this Part. Where
unallowable costs have been claimed and reimbursed, they will be
refunded to the program that reimbursed the unallowable cost using
one of the following methods: (a) A cash refund, (b) offset to a
subsequent claim, or (c) credits to the amounts charged to
individual Federal awards. Cash refunds, offsets, and credits may
include at the option of the cognizant agency for indirect cost,
earned or imputed interest from the date of expenditure and
delinquent debt interest, if applicable, chargeable in accordance
with applicable cognizant agency for indirect cost claims collection
regulations.

Appendix VII to Part 75--States and Local Government and Indian Tribe
Indirect Cost Proposals

A. General

    1. Indirect costs are those that have been incurred for common
or joint purposes. These costs benefit more than one cost objective
and cannot be readily identified with a particular final cost
objective without effort disproportionate to the results achieved.
After direct costs have been determined and assigned directly to
Federal awards and other activities as appropriate, indirect costs
are those remaining to be allocated to benefitted cost objectives. A
cost may not be allocated to a Federal award as an indirect cost if
any other cost incurred for the same purpose, in like circumstances,
has been assigned to a Federal award as a direct cost.
    2. Indirect costs include (a) the indirect costs originating in
each department or agency of the governmental unit carrying out
Federal awards and (b) the costs of central governmental services
distributed through the central service cost allocation plan (as
described in Appendix V to part) and not otherwise treated as direct
costs.
    3. Indirect costs are normally charged to Federal awards by the
use of an indirect cost rate. A separate indirect cost rate(s) is
usually necessary for each department or agency of the governmental
unit claiming indirect costs under Federal awards. Guidelines and
illustrations of indirect cost proposals are provided in a brochure
published by the Department of Health and Human Services entitled
``A Guide for States and Local Government Agencies: Cost Principles
and Procedures for Establishing Cost Allocation Plans and Indirect
Cost Rates for Grants and Contracts with the Federal Government.'' A
copy of this brochure may be obtained from the HHS' Cost Allocation
Services at https://rates.psc.gov.
    4. Because of the diverse characteristics and accounting
practices of governmental units, the types of costs which may be
classified as indirect costs cannot be specified in all situations.
However, typical examples of indirect costs may include certain
state/local-wide central service costs, general administration of
the non-Federal entity accounting and personnel services performed
within the non-Federal entity, depreciation on buildings and
equipment, the costs of operating and maintaining facilities.
    5. This Appendix does not apply to state public assistance
agencies. These agencies should refer instead to Appendix VI to part
75.

B. Definitions

    1. Base means the accumulated direct costs (normally either
total direct salaries and wages or total direct costs exclusive of
any extraordinary or distorting expenditures) used to distribute
indirect costs to individual Federal awards. The direct cost base
selected should result in each Federal award bearing a fair share of
the indirect costs in reasonable relation to the benefits received
from the costs.
    2. Base period for the allocation of indirect costs is the
period in which such costs are incurred and accumulated for
allocation to activities performed in that period. The base period
normally should coincide with the governmental unit's fiscal year,
but in any event, must be so selected as to avoid inequities in the
allocation of costs.
    3. Cognizant agency for indirect costs means the Federal agency
responsible for reviewing and approving the governmental unit's
indirect cost rate(s) on the behalf of the Federal Government. The
cognizant agency for indirect costs assignment is described in
Appendix V, section F.
    4. Final rate means an indirect cost rate applicable to a
specified past period which is based on the actual allowable costs
of the period. A final audited rate is not subject to adjustment.
    5. Fixed rate means an indirect cost rate which has the same
characteristics as a predetermined rate, except that the difference
between the estimated costs and the actual, allowable costs of the
period covered by the rate is carried forward as an adjustment to
the rate computation of a subsequent period.
    6. Indirect cost pool is the accumulated costs that jointly
benefit two or more programs or other cost objectives.
    7. Indirect cost rate is a device for determining in a
reasonable manner the proportion of indirect costs each program
should bear. It is the ratio (expressed as a percentage) of the
indirect costs to a direct cost base.
    8. Indirect cost rate proposal means the documentation prepared
by a governmental unit or subdivision thereof to substantiate its
request for the establishment of an indirect cost rate.
    9. Predetermined rate means an indirect cost rate, applicable to
a specified current or

future period, usually the governmental unit's fiscal year. This
rate is based on an estimate of the costs to be incurred during the
period. Except under very unusual circumstances, a predetermined
rate is not subject to adjustment. (Because of legal constraints,
predetermined rates are not permitted for Federal contracts; they
may, however, be used for grants or cooperative agreements.)
Predetermined rates may not be used by governmental units that have
not submitted and negotiated the rate with the cognizant agency for
indirect costs. In view of the potential advantages offered by this
procedure, negotiation of predetermined rates for indirect costs for
a period of two to four years should be the norm in those situations
where the cost experience and other pertinent facts available are
deemed sufficient to enable the parties involved to reach an
informed judgment as to the probable level of indirect costs during
the ensuing accounting periods.
    10. Provisional rate means a temporary indirect cost rate
applicable to a specified period which is used for funding, interim
reimbursement, and reporting indirect costs on Federal awards
pending the establishment of a ``final'' rate for that period.

C. Allocation of Indirect Costs and Determination of Indirect Cost
Rates

1. General

    a. Where a governmental unit's department or agency has only one
major function, or where all its major functions benefit from the
indirect costs to approximately the same degree, the allocation of
indirect costs and the computation of an indirect cost rate may be
accomplished through simplified allocation procedures as described
in subsection 2.
    b. Where a governmental unit's department or agency has several
major functions which benefit from its indirect costs in varying
degrees, the allocation of indirect costs may require the
accumulation of such costs into separate cost groupings which then
are allocated individually to benefitted functions by means of a
base which best measures the relative degree of benefit. The
indirect costs allocated to each function are then distributed to
individual Federal awards and other activities included in that
function by means of an indirect cost rate(s).
    c. Specific methods for allocating indirect costs and computing
indirect cost rates along with the conditions under which each
method should be used are described in subsections 2, 3 and 4.

2. Simplified Method

    a. Where a non-Federal entity's major functions benefit from its
indirect costs to approximately the same degree, the allocation of
indirect costs may be accomplished by (1) classifying the non-
Federal entity's total costs for the base period as either direct or
indirect, and (2) dividing the total allowable indirect costs (net
of applicable credits) by an equitable distribution base. The result
of this process is an indirect cost rate which is used to distribute
indirect costs to individual Federal awards. The rate should be
expressed as the percentage which the total amount of allowable
indirect costs bears to the base selected. This method should also
be used where a governmental unit's department or agency has only
one major function encompassing a number of individual projects or
activities, and may be used where the level of Federal awards to
that department or agency is relatively small.
    b. Both the direct costs and the indirect costs must exclude
capital expenditures and unallowable costs. However, unallowable
costs must be included in the direct costs if they represent
activities to which indirect costs are properly allocable.
    c. The distribution base may be (1) total direct costs
(excluding capital expenditures and other distorting items, such as
pass-through funds, subawards in excess of $25,000, participant
support costs, etc.), (2) direct salaries and wages, or (3) another
base which results in an equitable distribution.

3. Multiple Allocation Base Method

    a. Where a non-Federal entity's indirect costs benefit its major
functions in varying degrees, such costs must be accumulated into
separate cost groupings. Each grouping must then be allocated
individually to benefitted functions by means of a base which best
measures the relative benefits.
    b. The cost groupings should be established so as to permit the
allocation of each grouping on the basis of benefits provided to the
major functions. Each grouping should constitute a pool of expenses
that are of like character in terms of the functions they benefit
and in terms of the allocation base which best measures the relative
benefits provided to each function. The number of separate groupings
should be held within practical limits, taking into consideration
the materiality of the amounts involved and the degree of precision
needed.
    c. Actual conditions must be taken into account in selecting the
base to be used in allocating the expenses in each grouping to
benefitted functions. When an allocation can be made by assignment
of a cost grouping directly to the function benefitted, the
allocation must be made in that manner. When the expenses in a
grouping are more general in nature, the allocation should be made
through the use of a selected base which produces results that are
equitable to both the Federal Government and the governmental unit.
In general, any cost element or related factor associated with the
governmental unit's activities is potentially adaptable for use as
an allocation base provided that: (1) It can readily be expressed in
terms of dollars or other quantitative measures (total direct costs,
direct salaries and wages, staff hours applied, square feet used,
hours of usage, number of documents processed, population served,
and the like), and (2) it is common to the benefitted functions
during the base period.
    d. Except where a special indirect cost rate(s) is required in
accordance with paragraph (C)(4) of this Appendix, the separate
groupings of indirect costs allocated to each major function must be
aggregated and treated as a common pool for that function. The costs
in the common pool must then be distributed to individual Federal
awards included in that function by use of a single indirect cost
rate.
    e. The distribution base used in computing the indirect cost
rate for each function may be (1) total direct costs (excluding
capital expenditures and other distorting items such as pass-through
funds, subawards in excess of $25,000, participant support costs,
etc.), (2) direct salaries and wages, or (3) another base which
results in an equitable distribution. An indirect cost rate should
be developed for each separate indirect cost pool developed. The
rate in each case should be stated as the percentage relationship
between the particular indirect cost pool and the distribution base
identified with that pool.

4. Special Indirect Cost Rates

    a. In some instances, a single indirect cost rate for all
activities of a non-Federal entity or for each major function of the
agency may not be appropriate. It may not take into account those
different factors which may substantially affect the indirect costs
applicable to a particular program or group of programs. The factors
may include the physical location of the work, the level of
administrative support required, the nature of the facilities or
other resources employed, the organizational arrangements used, or
any combination thereof. When a particular Federal award is carried
out in an environment which appears to generate a significantly
different level of indirect costs, provisions should be made for a
separate indirect cost pool applicable to that Federal award. The
separate indirect cost pool should be developed during the course of
the regular allocation process, and the separate indirect cost rate
resulting therefrom should be used, provided that: (1) The rate
differs significantly from the rate which would have been developed
under paragraphs (C)(2) and (C)(3) of this Appendix, and (2) the
Federal award to which the rate would apply is material in amount.
    b. Where Federal statutes restrict the reimbursement of certain
indirect costs, it may be necessary to develop a special rate for
the affected Federal award. Where a ``restricted rate'' is required,
the same procedure for developing a non-restricted rate will be used
except for the additional step of the elimination from the indirect
cost pool those costs for which the law prohibits reimbursement.

D. Submission and Documentation of Proposals

1. Submission of Indirect Cost Rate Proposals

    a. All departments or agencies of the governmental unit desiring
to claim indirect costs under Federal awards must prepare an
indirect cost rate proposal and related documentation to support
those costs. The proposal and related documentation must be retained
for audit in accordance with the records retention requirements
contained in Sec.  75.361.
    b. A governmental department or agency unit that receives more
than $35 million in direct Federal funding must submit its indirect
cost rate proposal to its cognizant agency for indirect costs. Other
governmental department or agency must develop an indirect cost
proposal in accordance with the requirements of this Part and
maintain the

proposal and related supporting documentation for audit. These
governmental departments or agencies are not required to submit
their proposals unless they are specifically requested to do so by
the cognizant agency for indirect costs. Where a non-Federal entity
only receives funds as a subrecipient, the pass-through entity will
be responsible for negotiating and/or monitoring the subrecipient's
indirect costs.
    c. Each Indian tribal government desiring reimbursement of
indirect costs must submit its indirect cost proposal to the
Department of the Interior (its cognizant agency for indirect
costs).
    d. Indirect cost proposals must be developed (and, when
required, submitted) within six months after the close of the
governmental unit's fiscal year, unless an exception is approved by
the cognizant agency for indirect costs. If the proposed central
service cost allocation plan for the same period has not been
approved by that time, the indirect cost proposal may be prepared
including an amount for central services that is based on the latest
federally-approved central service cost allocation plan. The
difference between these central service amounts and the amounts
ultimately approved will be compensated for by an adjustment in a
subsequent period.

2. Documentation of Proposals

    The following must be included with each indirect cost proposal:
    a. The rates proposed, including subsidiary work sheets and
other relevant data, cross referenced and reconciled to the
financial data noted in subsection b. Allocated central service
costs will be supported by the summary table included in the
approved central service cost allocation plan. This summary table is
not required to be submitted with the indirect cost proposal if the
central service cost allocation plan for the same fiscal year has
been approved by the cognizant agency for indirect costs and is
available to the funding agency.
    b. A copy of the financial data (financial statements,
comprehensive annual financial report, executive budgets, accounting
reports, etc.) upon which the rate is based. Adjustments resulting
from the use of unaudited data will be recognized, where
appropriate, by the Federal cognizant agency for indirect costs in a
subsequent proposal.
    c. The approximate amount of direct base costs incurred under
Federal awards. These costs should be broken out between salaries
and wages and other direct costs.
    d. A chart showing the organizational structure of the agency
during the period for which the proposal applies, along with a
functional statement(s) noting the duties and/or responsibilities of
all units that comprise the agency. (Once this is submitted, only
revisions need be submitted with subsequent proposals.)

3. Required Certification.

    Each indirect cost rate proposal must be accompanied by a
certification in the following form:

Certificate of Indirect Costs

    This is to certify that I have reviewed the indirect cost rate
proposal submitted herewith and to the best of my knowledge and
belief:
    (1) All costs included in this proposal [identify date] to
establish billing or final indirect costs rates for [identify period
covered by rate] are allowable in accordance with the requirements
of the Federal award(s) to which they apply and the provisions of
this 45 CFR part 75. Unallowable costs have been adjusted for in
allocating costs as indicated in the indirect cost proposal.
    (2) All costs included in this proposal are properly allocable
to Federal awards on the basis of a beneficial or causal
relationship between the expenses incurred and the agreements to
which they are allocated in accordance with applicable requirements.
Further, the same costs that have been treated as indirect costs
have not been claimed as direct costs. Similar types of costs have
been accounted for consistently and the Federal Government will be
notified of any accounting changes that would affect the
predetermined rate.
    I declare that the foregoing is true and correct.
Governmental Unit:
Signature:
Name of Official:
Title:
Date of Execution:

E. Negotiation and Approval of Rates

    1. Indirect cost rates will be reviewed, negotiated, and
approved by the cognizant agency on a timely basis. Once a rate has
been agreed upon, it will be accepted and used by all Federal
agencies unless prohibited or limited by statute. Where a Federal
awarding agency has reason to believe that special operating factors
affecting its Federal awards necessitate special indirect cost
rates, the funding agency will, prior to the time the rates are
negotiated, notify the cognizant agency for indirect costs.
    2. The use of predetermined rates, if allowed, is encouraged
where the cognizant agency for indirect costs has reasonable
assurance based on past experience and reliable projection of the
non-Federal entity's costs, that the rate is not likely to exceed a
rate based on actual costs. Long-term agreements utilizing
predetermined rates extending over two or more years are encouraged,
where appropriate.
    3. The results of each negotiation must be formalized in a
written agreement between the cognizant agency for indirect costs
and the governmental unit. This agreement will be subject to re-
opening if the agreement is subsequently found to violate a statute,
or the information upon which the plan was negotiated is later found
to be materially incomplete or inaccurate. The agreed upon rates
must be made available to all Federal agencies for their use.
    4. Refunds must be made if proposals are later found to have
included costs that (a) are unallowable (i) as specified by law or
regulation, (ii) as identified in Sec.  75.420 of this part, or
(iii) by the terms and conditions of Federal awards, or (b) are
unallowable because they are clearly not allocable to Federal
awards. These adjustments or refunds will be made regardless of the
type of rate negotiated (predetermined, final, fixed, or
provisional).

F. Other Policies

1. Fringe Benefit Rates

    If overall fringe benefit rates are not approved for the
governmental unit as part of the central service cost allocation
plan, these rates will be reviewed, negotiated and approved for
individual recipient agencies during the indirect cost negotiation
process. In these cases, a proposed fringe benefit rate computation
should accompany the indirect cost proposal. If fringe benefit rates
are not used at the recipient agency level (i.e., the agency
specifically identifies fringe benefit costs to individual
employees), the governmental unit should so advise the cognizant
agency for indirect costs.

2. Billed Services Provided by the Recipient Agency

    In some cases, governmental departments or agencies (components
of the governmental unit) provide and bill for services similar to
those covered by central service cost allocation plans (e.g.,
computer centers). Where this occurs, the governmental departments
or agencies (components of the governmental unit) should be guided
by the requirements in Appendix V relating to the development of
billing rates and documentation requirements, and should advise the
cognizant agency for indirect costs of any billed services. Reviews
of these types of services (including reviews of costing/billing
methodology, profits or losses, etc.) will be made on a case-by-case
basis as warranted by the circumstances involved.

3. Indirect Cost Allocations Not Using Rates

    In certain situations, governmental departments or agencies
(components of the governmental unit), because of the nature of
their Federal awards, may be required to develop a cost allocation
plan that distributes indirect (and, in some cases, direct) costs to
the specific funding sources. In these cases, a narrative cost
allocation methodology should be developed, documented, maintained
for audit, or submitted, as appropriate, to the cognizant agency for
indirect costs for review, negotiation, and approval.

4. Appeals

    If a dispute arises in a negotiation of an indirect cost rate
(or other rate) between the cognizant agency for indirect costs and
the governmental unit, the dispute must be resolved in accordance
with the appeals procedures of the cognizant agency for indirect
costs.

5. Collection of Unallowable Costs and Erroneous Payments

    Costs specifically identified as unallowable and charged to
Federal awards either directly or indirectly will be refunded
(including interest chargeable in accordance with applicable Federal
cognizant agency for indirect costs regulations).

6. OMB Assistance

    To the extent that problems are encountered among the Federal
agencies or governmental units in connection with the negotiation
and approval process, OMB will lend assistance, as required, to
resolve such problems in a timely manner.

Appendix VIII to Part 75--Nonprofit Organizations Exempted from Subpart
E of Part 75

Advance Technology Institute (ATI), Charleston, South Carolina
Aerospace Corporation, El Segundo, California
American Institutes of Research (AIR), Washington, DC
Argonne National Laboratory, Chicago, Illinois
Atomic Casualty Commission, Washington, DC
Battelle Memorial Institute, Headquartered in Columbus, Ohio
Brookhaven National Laboratory, Upton, New York
Charles Stark Draper Laboratory, Incorporated, Cambridge,
Massachusetts
CNA Corporation (CNAC), Alexandria, Virginia
Environmental Institute of Michigan, Ann Arbor, Michigan
Georgia Institute of Technology/Georgia Tech Applied Research
Corporation/Georgia Tech Research Institute, Atlanta, Georgia
Hanford Environmental Health Foundation, Richland, Washington
IIT Research Institute, Chicago, Illinois
Institute of Gas Technology, Chicago, Illinois
Institute for Defense Analysis, Alexandria, Virginia
LMI, McLean, Virginia
Mitre Corporation, Bedford, Massachusetts
Noblis, Inc., Falls Church, Virginia
National Radiological Astronomy Observatory, Green Bank, West
Virginia
National Renewable Energy Laboratory, Golden, Colorado
Oak Ridge Associated Universities, Oak Ridge, Tennessee
Rand Corporation, Santa Monica, California
Research Triangle Institute, Research Triangle Park, North Carolina
Riverside Research Institute, New York, New York
South Carolina Research Authority (SCRA), Charleston, South Carolina
Southern Research Institute, Birmingham, Alabama
Southwest Research Institute, San Antonio, Texas
SRI International, Menlo Park, California
Syracuse Research Corporation, Syracuse, New York
Universities Research Association, Incorporated (National
Acceleration Lab), Argonne, Illinois
Urban Institute, Washington DC
Non-profit insurance companies, such as Blue Cross and Blue Shield
Organizations
Other non-profit organizations as negotiated with Federal awarding
agencies

Appendix IX to Part 75--Principles for Determining Costs Applicable to
Research and Development Under Grants and Contracts with Hospitals

A. Purpose and Scope

1. Objectives

    This appendix provides principles for determining the costs
applicable to research and development work performed by hospitals
under grants and contracts with the Department of Health and Human
Services. These principles are confined to the subject of cost
determination and make no attempt to identify the circumstances or
dictate the extent of hospital participation in the financing of a
particular research or development project. The principles are
designed to provide recognition of the full allocated costs of such
research work under generally accepted accounting principles. These
principles will be applicable to both proprietary and non-profit
hospitals. No provision for profit or other increment above cost is
provided for in these principles. However, this is not to be
interpreted as precluding a negotiated fee between contracting
parties when a fee is appropriate.

2. Policy Guides

    The successful application of these principles requires
development of mutual understanding between representatives of
hospitals and of the Department of Health and Human Services as to
their scope, applicability and interpretation. It is recognized
that:
    a. The arrangements for hospital participation in the financing
of a research and development project are properly subject to
negotiation between the agency and the hospital concerned in
accordance with such Government-wide criteria as may be applicable.
    b. Each hospital, possessing its own unique combination of
staff, facilities and experience, should be encouraged to conduct
research in a manner consonant with its own institutional
philosophies and objectives.
    c. Each hospital in the fulfillment of its contractual
obligations should be expected to employ sound management practices.
    d. The application of the principles established herein shall be
in conformance with the generally accepted accounting practices of
hospitals.
    e. Hospitals receive reimbursements from the Federal Government
for differing types of services under various programs such as
support of Research and Development (including discrete clinical
centers) Health Services Projects, Medicare, etc. It is essential
that consistent procedures for determining reimbursable costs for
similar services be employed without regard to program differences.
Therefore, both the direct and indirect costs of research programs
must be identified as a cost center(s) for the cost finding and
step-down requirements of the Medicare program, or in its absence
the Medicaid program.

3. Application

    All operating agencies within the Department of Health and Human
Services that sponsor research and development work in hospitals
will apply these principles and related policy guides in determining
the costs incurred for such work under grants and cost-reimbursement
type contracts and subcontracts. These principles will also be used
as a guide in the pricing of fixed-price contracts and subcontracts.

B. Definition of Terms

    1. Organized research means all research activities of a
hospital that may be identified whether the support for such
research is from a federal, non-federal or internal source.
    2. Departmental research means research activities that are not
separately budgeted and accounted for. Such work, which includes all
research activities not encompassed under the term organized
research, is regarded for purposes of this document as a part of the
patient care activities of the hospital.
    3. Research agreement means any valid arrangement to perform
federally-sponsored research or development including grants, cost-
reimbursement type contracts, cost-reimbursement type subcontracts,
and fixed-price contracts and subcontracts.
    4. Instruction and training means the formal or informal
programs of educating and training technical and professional health
services personnel, primarily medical and nursing training. This
activity, if separately budgeted or identifiable with specific
costs, should be considered as a cost objective for purposes of
indirect cost allocations and the development of patient care costs.
    5. Other hospital activities means all organized activities of a
hospital not immediately related to the patient care, research, and
instructional and training functions which produce identifiable
revenue from the performance of these activities. If a non-related
activity does not produce identifiable revenue, it may be necessary
to allocate this expense using an appropriate basis. In such a case,
the activity may be included as an allocable cost (See paragraph C.4
below.) Also included under this definition is any category of cost
treated as ``Unallowable,'' provided such category of cost
identifies a function or activity to which a portion of the
institution's indirect cost (as defined in paragraph E.1.) are
properly allocable.
    6. Patient care means those departments or cost centers which
render routine or ancillary services to in-patients and/or out-
patients. As used in paragraph I.2.w, it means the cost of these
services applicable to patients involved in research programs.
    7. Allocation means the process by which the indirect costs are
assigned as between:
    a. Organized research,
    b. Patient care including departmental research.
    c. Instruction and training, and
    d. Other hospital activities.
    8. Cost center means an identifiable department or area
(including research) within the hospital which has been assigned an
account number in the hospital accounting system for the purpose of
accumulating expense by department or area.
    9. Cost finding is the process of recasting the data derived
from the accounts ordinarily kept by a hospital to ascertain costs
of the various types of services rendered. It is the determination
of direct costs by specific identification and the proration of
indirect costs by allocation.
    10. Step down is a cost finding method that recognizes that
services rendered by certain nonrevenue-producing departments or
centers are utilized by certain other nonrevenue producing centers
as well as by the revenue-producing centers. All costs of
nonrevenue-producing centers are allocated to all centers which they
serve, regardless of whether or not these centers produce

revenue. Following the apportionment of the cost of the nonrevenue-
producing center, that center will be considered closed and no
further costs are apportioned to that center.
    11. Scatter bed is a bed assigned to a research patient based on
availability. Research patients occupying these beds are not
physically segregated from nonresearch patients occupying beds.
Scatter beds are geographically dispersed among all the beds
available for use in the hospital. There are no special features
attendant to a scatter bed that distinguishes it from others that
could just as well have been occupied.
    12. Discrete bed is a bed or beds that have been set aside for
occupancy by research patients and are physically segregated from
other hospital beds in an environment that permits an easily
ascertainable allocation of costs associated with the space they
occupy and the services they generate.

C. Basic Considerations

1. Composition of Total Costs

    The cost of a research agreement is comprised of the allowable
direct costs incident to its performance plus the allocable portion
of the allowable indirect costs of the hospital less applicable
credits. (See paragraph C.5.)

2. Factors Affecting Allowability of Costs

    The tests of allowability of costs under these principles are:
    a. They must be reasonable.
    b. They must be assigned to research agreements under the
standards and methods provided herein.
    c. They must be accorded consistent treatment through
application of those generally accepted accounting principles
appropriate to the circumstances (See paragraph A.2.e.) and
    d. They must conform to any limitations or exclusions set forth
in these principles or in the research agreement as to types or
amounts of cost items.

3. Reasonable Costs

    A cost may be considered reasonable if the nature of the goods
or services acquired or applied, and the amount involved therefor
reflect the action that a prudent person would have taken under the
circumstances prevailing at the time the decision to incur the cost
was made. Major considerations involved in the determination of the
reasonableness of a cost are:
    a. Whether or not the cost is of a type generally recognized as
necessary for the operation of the hospital or the performance of
the research agreement,
    b. The restraints or requirements imposed by such factors as
arm's length bargaining, federal and state laws and regulations, and
research agreement terms and conditions,
    c. Whether or not the individuals concerned acted with due
prudence in the circumstances, considering their responsibilities to
the hospital, its patients, its employees, its students, the
Government, and the public at large, and
    d. The extent to which the actions taken with respect to the
incurrence of the cost are consistent with established hospital
policies and practices applicable to the work of the hospital
generally, including Government research.

4. Allocable Costs

    a. A cost is allocable to a particular cost center (i.e., a
specific function, project, research agreement, department, or the
like) if the goods or services involved are chargeable or assignable
to such cost center in accordance with relative benefits received or
other equitable relationship. Subject to the foregoing, a cost is
allocable to a research agreement if it is incurred solely to
advance the work under the research agreement; or it benefits both
the research agreement and other work of the hospital in proportions
that can be approximated through use of reasonable methods; or it is
necessary to the overall operation of the hospital and, in light of
the standards provided in this chapter, is deemed to be assignable
in part to organized research. Where the purchase of equipment or
other capital items are specifically authorized under a research
agreement, the amounts thus authorized for such purchases are
allocable to the research agreement regardless of the use that may
subsequently be made of the equipment or other capital items
involved.
    b. Any costs allocable to a particular research agreement under
the standards provided in these principles may not be shifted to
other research agreements in order to meet deficiencies caused by
overruns or other fund considerations, to avoid restrictions imposed
by law or by terms of the research agreement, or for other reasons
of convenience.

5. Applicable Credits

    a. The term applicable credits refers to those receipts or
negative expenditure types of transactions which operate to offset
or reduce expense items that are allocable to research agreements as
direct or indirect costs as outlined in paragraph E.1. Typical
examples of such transactions are: Purchase discounts, rebates, or
allowances; recoveries or indemnities on losses; sales of scrap or
incidental services; tuition; adjustments of overpayments or
erroneous charges; and services rendered to patients admitted to
federally funded clinical research centers, primarily for care
though also participating in research protocols.
    b. In some instances, the amounts received from the Federal
Government to finance hospital activities or service operations
should be treated as applicable credits. Specifically, the concept
of netting such credit items against related expenditures should be
applied by the hospital in determining the rates or amounts to be
charged to government research for services rendered whenever the
facilities or other resources used in providing such services have
been financed directly, in whole or in part, by federal funds. Thus,
where such items are provided for or benefit a particular hospital
activity, i.e., patient care, research, instruction and training, or
other, they should be treated as an offset to the indirect costs
apportioned to that activity. Where the benefits are common to all
hospital activities they should be treated as a credit to the total
indirect cost pool before allocation to the various cost objectives.

D. Direct Costs

1. General

    Direct costs are those that can be identified specifically with
a particular cost center. For this purpose, the term cost center
refers not only to the ultimate centers against which costs are
finally lodged such as research agreements, but also to other
established cost centers such as the individual accounts for
recording particular objects or items of expense, and the separate
account groupings designed to record the expenses incurred by
individual organizational units, functions, projects and the like.
In general, the administrative functions and service activities
described in paragraph VI are identifiable as separate cost centers,
and the expenses associated with such centers become eligible in due
course for distribution as indirect costs of research agreements and
other ultimate cost centers.

2. Application to Research Agreements

    Identifiable benefit to the research work rather than the nature
of the goods and services involved is the determining factor in
distinguishing direct from indirect costs of research agreements.
Typical of transactions chargeable to a research agreement as direct
costs are the compensation of employees for the time or effort
devoted to the performance of work under the research agreement,
including related staff benefit and pension plan costs to the extent
that such items are consistently accorded to all employees and
treated by the hospital as direct rather than indirect costs (see
paragraph E.2.d(2)); the costs of materials consumed or expended in
the performance of such work; and other items of expense incurred
for the research agreement, such as extraordinary utility
consumption. The cost of materials supplied from stock or services
rendered by specialized facilities or other institutional service
operations may be included as direct costs of research agreements
provided such items are consistently treated by the institution as
direct rather than indirect costs and are charged under a recognized
method of costing or pricing designed to recover only the actual
direct and indirect costs of such material or service and conforming
to generally accepted cost accounting practices consistently
followed by the institution.

E. Indirect Costs

1. General

    Indirect costs are those that have been incurred for common or
joint objectives, and thus are not readily subject to treatment as
direct costs of research agreements or other ultimate or revenue
producing cost centers. In hospitals such costs normally are
classified but not necessarily restricted to the following
functional categories: Depreciation; Administrative and General
(including fringe benefits if not charged directly); Operation of
Plant; Maintenance of Plant; Laundry and Linen Service;
Housekeeping; Dietary; Maintenance of Personnel; and Medical Records
and Library.

2. Criteria for Distribution

    a. Base period.
    A base period for distribution of indirect costs is the period
during which such costs

are incurred and accumulated for distribution to work performed
within that period. The base period normally should coincide with
the fiscal year established by the hospital, but in any event the
base period should be so selected as to avoid inequities in the
distribution of costs.
    b. Need for cost groupings.
    The overall objective of the allocation process is to distribute
the indirect costs described in paragraph F. to organized research,
patient care, instruction and training, and other hospital
activities in reasonable proportions consistent with the nature and
extent of the use of the hospital's resources by research personnel,
medical staff, patients, students, and other personnel or
organizations. In order to achieve this objective with reasonable
precision, it may be necessary to provide for selective distribution
by establishing separate groupings of cost within one or more of the
functional categories of indirect costs referred to in paragraph
E.1. In general, the cost groupings established within a functional
category should constitute, in each case, a pool of those items of
expense that are considered to be of like character in terms of
their relative contribution to (or degree of remoteness from) the