SECTION
II-A
SOCIAL SERVICES FISCAL MANUAL DETERMINATION OF COST
Section II A
ALLOWABLE COST Date March 31, 2024
II A-1
SECTION II - DETERMINATION OF ALLOWABLE/UNALLOWABLE COST
MARCH 31, 2024
Section II-A Allowable Cost – General Information
The Department policy covering the allowability of costs is based upon OMB Circular No. A-87
This section references Personnel Costs, Professional Services, Attorney Services, Board Member
Expenses, Telephone, Postage, Supplies, Cost of Space, ADP Equipment, Capital Equipment, Travel,
Training, Registration Fees and other costs. The Section also gives examples of each item listed above
as far as allowable and unallowable costs. Exclusion of a particular item of cost is not intended to imply
that it is unallowable.
The following costs are allowable:
A. Personnel Costs
Salaries, wages, and fringe benefits of DSS employees hired under the state merit system are
allowable as follows:
1. Salaries shall be allocated to programs by time distribution methods and supported
by payroll and attendance records for individual employees.
2. Temporary employee costs are allowable to the extent of the wages and fringe benefit
payments made by counties.
3. Bonuses, post-retirement health benefits and severance payments paid to agency
employees are allowable when such benefits are included in a county-wide pay plan
that complies with existing state personnel policies.
4. Wages and benefits paid to janitorial staff are classified as facility costs and are to
be reported with "cost of space" expenditures.
5. Hospital premiums paid for retirees are allowable when such benefits are included in the
county's official approved pay plan. These expenditures should be reported on the DSS-
1571, Part II, Line 311.
B. Professional Services
1. General
"Professional Services" can include a variety of administrative support functions
that an agency might purchase, including program-related services purchased from
an expert or consultant such as translation, interpretation or the services of an
attorney. Whichever type of services are purchased, the following requirements must
be met if the costs are to be reported on the DSS-1571 Part II as administrative support
for the agency:
SOCIAL SERVICES FISCAL MANUAL DETERMINATION OF COST
Section II A
ALLOWABLE COST Date March 31, 2024
II A-2
a. The services have not been identified as being services to clients, but are directly
and tangibly beneficial to the agency in the furtherance of its social services
programs.
b The services must be in conformity with a written contract which specifies terms
and conditions that have been properly executed, and are on file with both parties
prior to requesting reimbursement.
c. Legal expenses incurred in the prosecution of claims against the federal
government are unallowable. Likewise, legal expenses incurred in the
prosecution of claims or in any other litigation against the State of North Carolina,
or against an agency of the State of North Carolina, are unallowable.
d. Legal expenses incurred in defending the county department of social services
against claims brought in contention of wrongful action are allowable. This
would include attorney fees and those necessary additional expenses (such as
deposition costs, witness fees, and court reporter fees) incurred up to the point that a
settlement is agreed to, or that a judicial resolution is imposed. Any further costs
associated with the claim, including amounts paid to or on behalf of the claimant,
are unallowable. All costs associated with the filing of countersuits would also be
unallowable.
Contracts shall be negotiated on the basis of an established fixed rate. For the
services of professionals other than attorneys (attorney services are discussed below),
reimbursable rates may be negotiated as follows:
e. Regarding those services for which the Social Services Commission has
established, a maximum rate may be negotiated up to the rate established by the
Commission.
f. For services other than those addressed by the Social Services Commission,
reimbursable rates may also be negotiated provided that the county thoroughly
documents that the rate agreed upon is reasonable, necessary, and competitive.
2. Attorney Services Purchased By Contract - Legal & Administrative
The cost of legal services required in the administration of the grant programs is
allowable. The cost of legal services provided by the county attorney as a part of his/her
official duties (legal advisor to the county commissioners) is unallowable. Legal
expenses for the prosecution of claims against the federal government are unallowable.
Otherwise, attorney services may be purchased subject to the following:
a. Legal Attorney Services - These are defined as the activities engaged in by an
attorney in the actual provision of legal services to the agency. A rate may be
negotiated for these services, which must be inclusive of the attorney's time as
well as any adjunctive expenses routinely incurred by an attorney in the public
practice of law. Such adjunctive expenses might include photocopying, postage,
telephone bills, legal secretary expenses, and so on.
SOCIAL SERVICES FISCAL MANUAL DETERMINATION OF COST
Section II A
ALLOWABLE COST Date March 31, 2024
II A-3
As of May 20, 2016 counties are no longer be required to request a waiver from the
DSS Budget Office for Attorney Services Purchased By Contract – Legal &
Administrative that are above $125.00. Counties should continue to use due
diligence in obtaining quality services for the lowest possible negotiated price.
Counties must maintain compliance with the Code of Federal Regulations,
https://www.gpo.gov/fdsys/granule/CFR-2014-title2-vol1/CFR-2014-title2-vol1-
part200, as well as comply with any federal and/or state regulations when incurring
expenditures.
Agencies may also hire an attorney on a retainer basis, provided that the fees
reported for reimbursement are adjusted annually (by June 30
th
).
Child Support attorneys may not be hired on retainer per federal regulations
requiring reimbursement for ACTUAL TIME spent on a case based on the
contracted hourly rate.
b. Administrative Attorney Services - These are defined as the activities engaged in
by an attorney, which are outside the realm of legal services as defined in the
preceding paragraph. Specifically, this category would include attendance at
professional meetings, seminars, and the like. A rate of up to $55 per hour may
be negotiated for these services, not to exceed $440 per day.
Agencies may also hire an attorney on a retainer basis, provided that the fees
reported for reimbursement are adjusted annually (by June 30th).
Child Support attorneys may not be hired on retainer per federal regulations
requiring reimbursement for ACTUAL TIME spent on a case based on the
contracted hourly rate.
Travel and Subsistence payments are allowable in addition to the hourly rates up to a maximum of the
same rates that are applicable to the county DSS employees. These costs must be included in the
agreement as a budget addendum. However, an attorney may not be paid an hourly rate for time spent
traveling.
C. Board Member Expenses
Members of the county Board of Social Services may receive a per diem in such amount as
shall be established by the county board of commissioners. Reimbursement for subsistence
and travel shall be in accordance with a policy set by the county board of commissioners.
(Report on Part II as Code 311.)
D. Communications and Supplies
1. Includes such items as telephone services, postage, messenger service, postal meter
charges, printed stamped envelopes, special delivery fee, or postage due charges.
SOCIAL SERVICES FISCAL MANUAL DETERMINATION OF COST
Section II A
ALLOWABLE COST Date March 31, 2024
II A-4
2. Supplies include such general office supplies as paper, pencils, folders, unstamped
envelopes, clips, etc.; also personal property, e.g., staples, pencil sharpeners, file baskets,
books, etc., which do not meet the definition of non-expendable property.
E. Cost of Space that is essential to agency functions is a proper charge. Such charges may take
the form of:
1. Rental and service and maintenance costs in leased/rented buildings (from private
owners or other public agencies)
2. Costs of service and maintenance in county owned buildings (or provider agency owned
buildings). The standards for allowable costs in OMB Circular A-87 for depreciation
and use allowances and building space and related facilities apply.
F. Automatic Data Processing
The Federal Financial Participation (FFP) in the acquisition costs of data processing equipment
and services to meet local county agencies need is only available if it does not duplicate or
modify an already existing county or state system and limited by the following based criteria:
1. Individual items of computer equipment with a unit cost of less than $5,000 may be
expensed rather than depreciated regardless of the total cost of acquisition.
2. Prior approval is required for $1,000,000.00 or more on noncompetitively acquired
data processing equipment and services.
3. Competitively acquired data processing equipment and services used to meet county
needs, costing $5,000,000 or more per acquisition needs prior approval.
G. Equipment and Furniture
The following specific criterion applies to the purchase of office equipment:
1. Definition. - Items which are of a nonexpendable nature, having a useful life of
more than one year and an acquisition cost of $5,000.00 or more per unit, are
classified as nonexpendable equipment. A county may use its own definition of
equipment provided that such definition would at least include all tangible
nonexpendable property as defined above.
2. Availability of funding. - Federal participation is available in expenditures for
nonexpendable personal property only in the form of depreciation expense, or as an
annual use allowance of 6 2/3% of acquisition cost [except as indicated in item #6,
"Automatic Data Processing" and in paragraphs (l) and (2), below]. Whichever option is
chosen, allowability is limited to the period for which the property is used in the county
agency program(s).
SOCIAL SERVICES FISCAL MANUAL DETERMINATION OF COST
Section II A
ALLOWABLE COST Date March 31, 2024
II A-5
3. Furniture cannot be direct-charged.
a. A county may claim FFP in the full amount of expenditures for acquiring
nonexpendable personal property costing less than $25,000. In the case of property
acquired with a trade-in, the $25,000 limitation is applied to the amount paid for the
new property plus the book value of the property traded.
b. The $25,000 threshold is not applicable for purchases supported by funds from
USDA/FNS, the depreciation threshold for these purchases remains at $5,000.
4. Vehicles
a. Any vehicles purchased by the county using Federal and /or State funds
require prior approval from the Controller’s Office prior to purchasing.
Reimbursement for all vehicles is made at the administrative rate. When a vehicle
is purchased for use by a Department of Social Services (DSS), the cost is allocated
between the programs that will be using it. However, with prior approval of the
North Carolina Division of Social Services (NCDSS) program staff and the
Division of Social Services Deputy Director of Operations, and the assurance that
the vehicle will be used exclusively for one specific program, the cost of the vehicle
may be direct charged. To direct charge the vehicle's costs, the county must submit
a request that includes their assurance of exclusive use and the plan of use (how
many clients will use it, who else will be using it, why no other resource can be
used, etc.).
The total costs claimed each month may be determined in one of the
following ways:
(1.) Depreciation - Reimbursement for the vehicle may be claimed on a monthly
basis over its useful life. The Division has determined that the useful life of
a vehicle is 110,000 miles. Therefore, an estimate of the number of miles to
be driven per month, divided into the 110,000 will determine the useful life
of the vehicle in months. By dividing the purchase price by the useful life in
months, the result is the maximum monthly reimbursement amount. If
experience shows that the actual and estimate for monthly mileage use are
significantly different, then the maximum monthly allowance must be
adjusted.
Note: According to the Office of Controller State Policy (OSC), “The
general rule is that careful estimates of useful lives that later prove to
be incorrect based on new information should be considered changes
in estimates. Changes in estimates must be handled prospectively
(i.e., restatement of prior years is prohibited).”
For example, a vehicle is purchased during 2002 with the established
policy stating the useful life to calculate depreciation is based on
100,000 miles. Even though during 2004, the same vehicle continues
to be in use and had not fully depreciated, but a new revised policy
has instituted the useful life as 110,000 miles, the vehicle purchased
during 2002 would continue to calculate depreciation based on the
policy in place when the vehicle was originally purchased.
SOCIAL SERVICES FISCAL MANUAL DETERMINATION OF COST
Section II A
ALLOWABLE COST Date March 31, 2024
II A-6
If the 110,000 mile basis is not appropriate, an alternative method
may be requested. The request must be sent to the DHHS
Controller’s Office and include your justification for the alternative.
(2.) Use allowance - Reimbursement for the vehicle may be claimed on the basis
of use. By dividing the purchase price by 110,000 miles (useful life as
above) the result is the cost per mile. For example, if the purchase price of a
vehicle was $22,000, the mileage rate is $0.20/mile. The cost per mile is
then multiplied by the total miles on the log for the month to determine the
reimbursement amount for the current month.
(3.) Expensed - With the prior review by NCDSS program staff and the approval
of the Deputy Director of Operations, a county may expense a vehicle that
costs up to $25,000.
(4.) Mileage - Reimbursement for the vehicle may be claimed using the
allowable rate for the county, up to the limit of the IRS rate (such as, 22 or
30 cents per mile). This method normally takes into account all
maintenance, insurance, etc.; so any of these costs included in the rate may
not be claimed in addition to mileage rate.
(5.) Regardless of the method of reporting for reimbursement, the county must
maintain an ongoing log that accounts for the purpose of use for 100% of the
miles driven. The county must also maintain invoices, logs, worksheets, and
other records as necessary to support the claim for reimbursement. For items
numbered (1) through (3) above, other expenses, such as maintenance,
insurance, gas, etc. may be claimed for reimbursement in addition to the
mileage rate.
(6.) The purchase of a vehicle must be in accordance with policy contained in
Code of Federal Regulations at 45 CFR Part 95 as well as other policies
relative to equipment purchases and management of property.
(7.) An ownership interest is maintained in a vehicle purchased with any federal
funding. Therefore, a vehicle expensed cannot be disposed of without the
same percentage of proceeds, or unused portion, being returned to the federal
program(s) as was used to reimburse for it. For example, if a county that
normally follows the use allowance method expensed a $20,000 vehicle
($10,000 federal funds and $10,000 county funds) and disposed of it after
only 27,500 miles of use, the county would have to return $7,500 to the
federally funded program. This is determined by computing the unused
portion of the vehicle, which is 75% {(110,000 - 27,500)/110,000}, and the
amount of the purchase that was expensed to the federally funded program,
which is $10,000. The amount due the federal program is the unused portion
of the federal funding or 75% times $10,000.
(8.) For information on allowing non-program participants to ride on a vehicle
previously direct charged to a specific program, please contact the division
of Social Services.
SOCIAL SERVICES FISCAL MANUAL DETERMINATION OF COST
Section II A
ALLOWABLE COST Date March 31, 2024
II A-7
b. Contract providers may purchase vehicles subject to the conditions listed below:
(1.) The Contractor will retain title to the vehicle(s) and will immediately
transfer title to the Department of Health and Human Services upon
termination of the contract; dissolution of articles of incorporation or other
similar action that may have an adverse effect on the Contractor's ability to
carry out the provisions of the contract, whichever occurs first.
(2.) The Contractor may not trade or otherwise dispose of the vehicle(s) without
written consent of the Division of Social Services.
(3.) The purchase of the vehicle(s) must be in accordance with policy contained
in Code of Federal Regulations at 45 CFR Part 95 as well as other policies
relative to equipment purchases and management of property.
(4.) Conditions and requirements (a) through (c) must be incorporated in each
year's contract and shall remain in effect as long as a valid contract exists or
until the vehicle(s) useful life (as defined by the Division of Social Services)
is exhausted, which occurs first.
H. Travel
County staff is authorized reimbursement for official travel that is within the context of a
county-wide travel plan approved by the Board of County Commissioners and maintained in the
county for review and audit. In the absence of such a county plan, reimbursement of claims
submitted to the Division shall not exceed the maximum allowable under state policy.
I. Staff Development and Training
Costs for training, meetings/conferences, seminars or workshops, payment for books; training
supplies and equipment; tuition; registration for training sessions; travel and per diem for
trainees; cost of space rented for training are proper charges. If any of these costs are client-
related and can be identified to a particular program or funding source, then the costs should be
charged directly to that program or funding source. Furniture and supplies cannot be direct
charged.
Note: Documentation is required at the county level to support agendas and costs.
J. Convention Registration
State law allows reimbursement of the actual amount of convention registration fees as shown
by a valid receipt or invoice G.S. 138-6(a), (4).
SOCIAL SERVICES FISCAL MANUAL DETERMINATION OF COST
Section II A
ALLOWABLE COST Date March 31, 2024
II A-8
K. Lease/Purchase Agreements
A lease of personal property with an option to purchase the property is subject to the laws and
contracting requirements mentioned under FORMAL BIDDING, INFORMAL BIDDING, and
LOW VALUE PURCHASES. The total estimated expenditure determines which of these types
of purchases/contracts applies to the lease-purchase.
For accounting purposes, lease-purchase agreements are recorded as purchases of fixed
assets with the related incurring of debt. Counties are cautioned that they may not enter into
a lease-with-option-to-purchase without complying with the applicable bidding requirements.
Such a lease-option agreement must be let to contract after complying with the competitive
bidding rules, even though the rental payments will be credited toward the purchase price should
the option be exercised at some later date.
Counties are further cautioned that, in awarding a contract for the purchase of equipment, they
may not take into consideration the terms of a lease with a lessor under which the county can be
given credit (on the purchase price of the equipment) for amounts already paid the lessor.
And finally, counties may not claim State/Federal Financial Participation in that portion of
the total amount of a lease agreement that exceeds the amount that the leased equipment
could have been purchased for at the outset.
Policy: A lease is an agreement between a lessor and a lessee that gives the lessee the right to
use property, plant or equipment for a specific period of time in return for stipulated cash
payments. Leases are classified as either capital or operating.
Capital Leases: According to Financial Accounting Standards Board (FASB) Statement 13,
"Accounting for Leases", a lease is considered a capital lease if it meets any one of the following
criteria:
The lease transfers ownership of the property to the lessee by the end of the lease term.
The lease contains an option to purchase the leased property at a bargain price.
The lease term is equal to or greater than 75 percent of the estimated economic life of the
leased property (e.g., lease term four years, estimated life five years).
The present value of rental and other minimum lease payments equals or exceeds 90
percent of the fair value of the leased property less any investment tax credit retained
by the lessor (e.g., future minimum lease payments $9,000, fair value $10,000).
Operating Leases: To determine if a lease is operating, review the four criteria above. If it does
not meet any of the criteria, the lease is considered an operating lease. All costs incurred are
expensed when recording operating lease activity. Neither an asset nor an obligation is recorded
for operating leases. Accordingly, rental payments are recorded as rental expense in the
operating statement. Note disclosure is required on the financial statements.
L. Lease/Rental Agreements
Competitive bidding is required based on the amounts indicated in items 3 and 4 of VIII A-2-1,
even if the equipment is already on site on a rental or lease arrangement.
SOCIAL SERVICES FISCAL MANUAL DETERMINATION OF COST
Section II A
ALLOWABLE COST Date March 31, 2024
II A-9
M. Other Allowable Items of Cost
1. Bonds covering county agency employees in their official capacities.
2. Insurance on facilities.
3. Allocated costs for county central supporting services (Indirect Cost) provided a
county-wide cost allocation plan has been prepared and is on file.
4. Agency memberships in business, technical and professional organizations whose
purpose is social services related.
5. Agency subscriptions to business, technical and professional periodicals and books
regarded as program related, necessary and reasonably priced.
6. Taxes that are paid directly by an agency, and for which refunds or legal
exemptions are not permitted by law, are allowable. An example of sales taxes paid
which are reimbursable are those paid to an out of state entity. Please note the following
clarifications as to how this policy applies in certain instances.
(a) When an agency reimburses an employee for actual travel expenses (or pays the
employee an allowance in lieu of such reimbursement), the county may not
properly claim a refund on sale taxes paid in connection with the travel expenses.
Thus, the agency may report these sales taxes to the Division of Social Services
for state and federal financial participation.
(b) When an agency stockpiles goods (such as fuel, heaters, blankets, fans, food,
etc.) which will subsequently be given or loaned to recipients who are not
specifically identified when the goods are purchased, the purchases are
considered to have been made by and for the agency. The sales taxes paid
thereon may be properly refunded to the county by the North Carolina
Department of Revenue, and therefore are not allowable for state and federal
financial participation through the Division. (In this situation, the tax refund
status is essentially no different than it would be if the agency bought a box of
paper clips - the tax is refundable.)
7. Notary Public fees or necessary costs incurred in the process of securing notary status
for agency employees are allowable.
8. Physicians, dentists, psychiatrists - when providing direct medical care may receive
up to $75.00/hour.
9. Stipends for cell phone usage-Federal regulations require reimbursement cost to be of
measurable value in order for funds to be expensed. A settlement process is necessary to
ensure that counties only document valid business expenditures which can withstand
audits.
SECTION
II-B
SOCIAL SERVICES FISCAL MANUAL DETERMINATION OF COST
Section II B
UNALLOWABLE COST Date March 31, 2024
II B-1
Section II-B Unallowable Cost – General Information
The following costs are unallowable for State and Federal financial participation:
1. Costs of dues, memberships, or subscriptions for individual employees.
2. Bad debts or losses arising from accounts declared uncollectible
3. Contributions to a contingency reserve or any similar provision for unforeseen events.
(For the Work First Program, such a reserve, funded by county funds, may count toward the
county’s required Maintenance of Effort, per G.S. 108A 27.4 (c).)
4. Entertainment costs, amusements and social activities
5. Fines and penalties resulting from violations or failure to comply
6. Taxes which could have been legally recouped by means of exemption or refund.
7. Interest payments are unallowable, with the exception of expenditures for interest incurred
for the financing of buildings newly occupied.
SECTION
II-C
SOCIAL SERVICES FISCAL MANUAL DETERMINATION OF COST
Section II C
COSTS ALLOWABLE WITH PRIOR FEDERAL APPROVAL Date March 31, 2024
II C-1
Section II-C Costs Allowable with Prior Federal Approval
The following costs are allowable for state and federal financial participation (SFFP) only when
written approval has been granted by the appropriate agency of the state or federal
government before the incursion of the costs.
1. Costs Requiring Prior Approval of the Federal Government, Through the Division of
Social Services:
a. Prior approval is required for $1,000,000.00 or more noncompetitively acquired
data processing equipment and services. For counties, this threshold is based on
annual total costs (SFY).
b. Competitively acquired data processing equipment and services to meet county needs
and costing $5,000,000 or more per acquisition requires prior approval. For counties,
this threshold is based on annual total costs (SFY).
c. Costs of space:
(1) for periods of non-occupancy
(2) acquired under rental-purchase or a lease with option-to-purchase
d. Costs of facilities, equipment, or other capital assets, as well as repairs which
materially increase the value or useful life of existing capital assets.
e. Contributions to a reserve for self-insurance.
Prior approval is required for self-insurance plans which are intended to be reserves
for the replacement of property (e.g. buildings and equipment).
Self-insurance plans which satisfy the provisions of "employee fringe benefits" do
not require prior approval since such plans would be considered "fringe benefits". In
addition to satisfying the provisions of page II F-43, the plan must be approved by
the County Commissioners, be on file, and be applicable to all county employees
(not just DSS employees). The Division of Cost Allocation of the HHS Regional
Office recommends that counties include descriptions of the provisions and
methodology of the (fringe benefit) self-insurance plan and other fringe benefits in
the narrative portion of their indirect cost plan. A description of any applicable
(fringe benefit) self-insurance plan should be included (e.g. workmen's compensation,
health insurance, etc.).
The following policies apply to self-insurance plans that qualify as employee fringe
benefits.
(l) No prior approval from the State Office is required.
(2) No annual adjustment to actual cost is required. An adjustment to the reserve
may be necessary if the amount in the reserve exceeds a reasonable amount.
SOCIAL SERVICES FISCAL MANUAL DETERMINATION OF COST
Section II C
COSTS ALLOWABLE WITH PRIOR FEDERAL APPROVAL Date March 31, 2024
II C-2
There are two acceptable ways of determining if the reserve amount is
reasonable: (a) if it has been shown by actuarial study to be reasonable or (b)
if the reserve amount does not exceed the amount of actual claims paid for the
prior three year period.
(3) All counties are advised to conduct an annual review of their self-insurance
plans. The review should indicate whether or not the reserve contains a
reasonable amount (as discussed in Item 2 above). A review of the reserve
might reveal that adjustments need to be made in the rates (e.g., if the reserve
exceeds the amount of claims paid in the prior three year period).
f. Costs of management studies performed by governmental agencies other than
the Division of Social Services.
g. Prior Approval Requirement for Automated Data Processing Equipment and/or
Services. - Acquisitions of automated data processing equipment (hardware and
software) and services are governed by federal regulations of the Department of
Health and Human Services (DHHS) and the Department of Agriculture, Food and
Nutrition Service (USDA). Prior written approval must be obtained from both the
DHHS Division of Information Resource Management (DIT) and the federal
government (if DHHS and/or USDA will be participating in any of the costs) in any
of the following circumstances:
(1) The total acquisition cost is $5,000,000 or greater and acquired
competitively (45 CFR 95.611, 7 CFR 277.18(c), Policy IIA1).
(2) The total acquisition cost is $1,000,000 or greater, and is acquired non-
competitively from non-governmental sources (45 CFR 95.611, 7 CFR
277.18(c), Policy IIA2).
(3) Federal financial participation (FFP) is being requested at an enhanced
rate, regardless of the acquisition cost (45 CFR 95.611, 7 CFR 277.18(c)).
This applies to equipment being acquired to access the Eligibility
Information System (EIS) (Policy IIA3).
If an acquisition does not require DIT and federal approval under the three
circumstances above, DIT prior written approval is required, regardless of
acquisition cost, if the project includes any of the following (Policy IIA4):
(1) Development of software, custom modifications of purchased software, or purchase
of software other than off-the-shelf software commercially available to the public for
general business or personal use.
DIT and/or federal approval is obtained by submitting an Advance Planning
Document (APD) to the Division of Social Services (45 CFR 95.611, 7 CFR
277.18(c), Policy IIA). Prior written approval thresholds for county acquisitions are
determined based on the cumulative total for the fiscal year (Policy IIG).
SOCIAL SERVICES FISCAL MANUAL DETERMINATION OF COST
Section II C
COSTS ALLOWABLE WITH PRIOR FEDERAL APPROVAL Date March 31, 2024
II C-3
Prior approval is not required for certain types of acquisitions and FFP is available at
the regular rates if the acquisition does not require prior written approval by DIT
and/or the federal government as described above. An ADP Equipment Acquisition
Plan must be filed with the Division of Social Services prior claiming the
expenditures for reimbursement; counties may wish to submit their plan before
acquisition of the equipment. Items purchases which are subsequently not approved
must be funded with 100% county dollars. Acquisitions in this category are:
(1) Terminals, personal computers, personal computer printers or workstations up
to the level of one such device per worker.
(2) System printers up to one per three workers or one per floor or one per site,
whichever is greater.
(3) Local area networks or minicomputers when necessary to maximize the
benefit of such devices and other devices as required to connect to the state
network.
(4) Off-the-shelf software commercially available to the public for general
business or personal use.
Acquisitions by central county data processing facilities of data processing equipment and services
from commercial sources that are acquired primarily to support public assistance programs are
subject to the prior written DIT and federal approval requirements. Data processing equipment and
services are considered to be primarily acquired to support public assistance programs when these
programs may reasonably be expected to either be billed for more than fifty percent (50%) of the
total charges made to all users of data processing equipment and services during the time period
covered by the service agreement or directly charged for the total cost of the purchase or lease of data
processing equipment or services (45 CFR 95.605).
h. Building space and related facilities. - The cost of space in privately or publicly
owned buildings used for the benefit of the grant program is allowable subject to the
conditions stated below. The total cost of space, whether in a privately or publicly
owned building, may not exceed the rental cost of comparable space and facilities in
a privately-owned building in the same locality. The cost of space procured for
grant program usage may not be charged to the program for periods of
nonoccupancy, without authorization of the grantor Federal agency.
i. Capital expenditures. - The cost of facilities, equipment, other capital assets, and
repairs which materially increase the value or useful life of capital assets is allowable
when such procurement is specifically approved by the Federal grantor agency.
When assets acquired with Federal grant funds are (a) sold; (b) no longer available
for use in a federally-sponsored program; or (c) used for purposes not authorized by
the grantor agency, the Federal grantor agency's equity in the asset will be refunded
in the same proportion as Federal participation in its cost. In case any assets are
traded on new items, only the net cost of the newly-acquired assets is allowable.
SECTION
II-D
SOCIAL SERVICES FISCAL MANUAL DETERMINATION OF COST
COST OF SPACE Section II D
GENERAL Date March 31, 2024
II D-1
Section II-D Cost of Space
It is the responsibility of each county (or contract provider) to secure and maintain the adequate
housing to efficiently meet particular needs of its Department of Social Services (or other provider
agency) in the administration of the social services programs. Toward that end, costs incurred in
providing such space will generally be allowable and eligible for state and federal financial
participation.
Claims may be made for cost incurred in:
l. Paying rent and attendant service and maintenance costs in privately owned buildings
2. Providing service and maintenance for buildings owned by the county (or provider
agency).
3. Making repairs or alterations to buildings owned by the county (or provider agency)
4. Providing adequate and necessary parking areas for facilities owned by the county (or
provider agency)
5. Upfit and/or renovations for buildings acquired by the county via lease/purchase agreements.
No costs for uplift and or renovations may be claimed for leased space unless ownership
passes to the county at the end of the lease term.
Such reporting must be for actual costs incurred in providing a benefit to the social service programs
and must be reasonable and necessary for proper and efficient administration of those programs. In
addition, such reporting must be net of all applicable credits, and may not be included as a cost of
other federally funded programs in either the current or a prior period.
The Division of Social Services does not currently engage in the approval of cost-of-space
agreements, nor does it require claimants to secure three letters of comparable rent.
Nevertheless, counties are reminded of the federal requirement that the total cost of space,
whether in a privately or publicly owned building, may not exceed the rental cost of
comparable space and facilities in a privately owned building in the same locality. Effective
July 1, 1984 the State's method of implementing this requirement is as follows: (a) for publicly
owned buildings, reimbursement is limited to no more than the actual cost; (b) for rented or leased
space, either competitive procurement is required or justification for a sole source is required.
SOCIAL SERVICES FISCAL MANUAL DETERMINATION OF COSTA
COST OF SPACE Section II D
GENERAL Date March 31, 2024
II D-2
l. Rent and/or Service and Maintenance in Leased/Rented Buildings (from private owners or
other public agencies)
A copy of the signed lease agreement executed in accordance with N.C. General
Statute l59 must be kept on file. Unless specifically authorized to do so by the County
Board of Commissioners, DSS directors may not sign leases for facilities.
Costs are allowable if documented and if the following procurement procedures are followed:
If the expenditure of funds during the lease period (or for one year, whichever is longer)
exceeds $90,000, formal bidding procedures must be followed (advertising, receiving of
sealed bids, etc.). A new lease or a renewal would both require formal bidding if the
lease/rental cost exceeds $90,000.
If the amount of the rental/lease is from $30,000 to $90,000, an informal bidding process is required
(quotations from vendors on price and availability may be solicited by phone, letter or similar
methods).
2. Service and Maintenance Costs in County Owned Buildings (or Provider Agency Owned
Buildings)
Financial participation is available for service and maintenance costs that are necessary to
maintain space suitable for continuous occupancy by the local department. Examples might
include the costs associated with utilities, insurance, security, janitorial service, elevator
service, painting, decorating, and up keeping of grounds, normal maintenance repairs,
and depreciation. A county may claim FFP for DSS occupied space only; no claim may be
made for the cost of idle, excess, or unoccupied space, except with prior written approval of
the grantor federal agency. In addition, actual expenditures for interest incurred for the
financing of buildings is allowable for buildings newly occupied on or after October l,
l980.
Reporting for service and maintenance may be on the basis of actual current
expenditures, or they may be on the basis of a "fixed" amount which is derived from the
actual certified (audited) expenditures of the previous fiscal year.
When reportings are based on the fixed amount method, the necessity of adjusting reportings
to actual cost is avoided because the county is, in effect, reporting actual costs one year in
arrears.
SOCIAL SERVICES FISCAL MANUAL DETERMINATION OF COSTA
COST OF SPACE Section II D
GENERAL Date March 31, 2024
II D-3
Financial participation is available in the cost of maintenance, repairs, and alterations of space
occupied by county departments of social services and provider agencies. Such costs must be
necessary for the maintenance of proper facilities used for the administration of the social services
programs. Routine maintenance repairs may be reported in full at the time expenditures are
made, but major renovations and/or alterations must be reported on the basis of depreciation
or use allowance.
l. Principles
The following principles will govern financial participation in the costs of maintenance
repairs and alterations:
a. Expenditures should be necessary and beneficial to the successful operation of the
county or provider agency program.
b. Where space is shared with other agencies, the cost of repairs or alterations
benefiting all agencies must be allocated on the basis of a reasonable pro rata share;
that is, on the basis of the amount of space occupied by the county or provider
agency in relation to the total building space. Where repairs and alterations benefit
only one agency, these costs (whether direct expense or depreciation) will be charged
to that agency. The county DSS should retain documentation to support their method
of prorating shared building expenses.
c. The county DSS must retain documentation of depreciation schedules, which
must be based on the straight line method. The county must retain documentation
of the original cost of the building and the cost of any renovations to the building.
The "standard useful life" of a masonry and steel building is assumed to be 45
years or IRS guidelines. The county DSS must document their method of
determining the useful life of a building if the "standard useful life" is not used. Also
the standard useful life of mobile homes is ten years.
2. Distinction Between Maintenance Repairs and Major Renovations/Alterations
The distinction between maintenance repairs and (major) renovations and alterations usually
depends on whether the expenditure is for routine "up-keep" of the building or for extensive
repairs or alterations involving substantial structural changes or replacements.
a. Maintenance Repairs
Repairs of this type are generally minor in nature and do not involve structural
changes or alterations in buildings. Examples of minor maintenance repairs
include patching of a roof, painting and decorating, repairing plaster, repairing
doors and locks, minor or routine repairs to elevators, plumbing, or electrical
equipment, and repair of equipment parts. Maintenance repair items should not
be capitalized and depreciated. These items should be reported as expenses for the
month in which they are paid.
SOCIAL SERVICES FISCAL MANUAL DETERMINATION OF COSTA
COST OF SPACE Section II D
GENERAL Date March 31, 2024
II D-4
b. Major Renovations and Alterations
These repairs usually involve substantial alterations and/or structural changes in
buildings. Examples of major renovations and alterations include the following:
replacement of a whole roof, construction of fixed or permanent partitions, the
cost and installation of heating, plumbing, air conditioning, and electrical
systems. All items classified as major renovations or alterations should be
capitalized and depreciated over the anticipated life of the item or the remaining life
of the building.
NOTE: No costs for major renovations and alterations may be claimed for leased space. The space
must be owned by the county or must have been acquired through a lease purchase agreement with
ownership passing to the county at the end of the lease term.
SOCIAL SERVICES FISCAL MANUAL DETERMINATION OF COST
COST OF SPACE Section II D
LEASE PURCHASE OF BUILDINGS Date March 31, 2024
II D-6
l. The costs of providing parking facilities necessary for the efficient administration of the
social services program will be subject to Federal financial participation.
2. The provision of parking facilities for the use of the staff of a county department of social
services, and for persons who may need to visit the offices on official business, is an
important means of facilitating the administration of the public assistance programs. Since
home investigations of applicants and recipients of public assistance are generally necessary
in the determination of eligibility, it is usual that such investigations are made by field
workers using a car. In view of the location of many county social services departments (in
business districts where streets in the vicinity of the offices are congested) and of the
widespread practice of metering street space in urban localities, it becomes increasingly
important for field workers as well as other agency staff to have ready access to convenient
parking space. For the same reasons, some provision for off-street parking is frequently
necessary for the public that may need to visit the social services office on official business.
3. Financial participation is available in the cost of providing parking facilities under the
policies applicable to all other joint administrative costs. Participation in such expenses
would include the costs of providing parking facilities which are of benefit to both the staff of
the social services and contract provider agencies, and to persons who may need to visit the
office of the social services department on official business. Parking facilities (for the
purpose of financial participation) include the rental, construction, or purchase of garages
and parking lots, excluding the cost of land. For purchase and construction of a parking
facility, the amount claimed must be limited to annual depreciation or use allowance that
is calculated using an actual cost basis. However, if expenditures for parking facilities are
incurred in connection with the purchase or construction of office space, they will be
considered as costs of occupancy of the building for purposes of Federal financial
participation under the principles governing the costs of office space.
4. If garage or parking lot space is to be used jointly by one or more other agencies, the cost
must be allocated on the basis of the extent of use by each agency or the proportion of the
total space allotted for use by the department of social services.
Fees for street parking or fees paid for individual parking space are not considered
administrative expense and therefore are not covered for participation.
The occupancy of a building under a rental-purchase or a lease with option to purchase
agreement is allowable only with prior approval of the federal grantor agency. The county
would need to submit their plan to the Division for review and forwarding to the federal office for
approval. No financial participation is available for these agreements prior to the receipt of written
approval from the federal grantor.
Also under rental-purchase or a lease with option to purchase agreement, reimbursement is limited to
the amount allowable if the building had been purchased outright.
SECTION
II-E
SOCIAL SERVICES FISCAL MANUAL DETERMINATION OF COST
Section II E
OMB Circular A-87 Date March 31, 2024
II E-1
Section II-E Indirect Cost Reporting
The purpose of this section is to present certain information and requirements relating to the reimbursement of
indirect costs. For information pertaining to the actual preparation of a county-wide central supporting
services cost allocation plan (indirect cost plan), counties should refer to N.C. Local Government Publication
No. l26 dated January, l980, and entitled "An Introduction to Indirect Costs", as well as "Cost Principles and
Procedures for Establishing Cost Allocation Plans and Indirect Cost Rates for Grants and Contracts with the
Federal Government", which was published in December 1976 by HEW and is usually referred to as OASC-l0.
Indirect Cost Defined - A direct cost is a cost which can be specifically or readily identified with a particular
DSS (or contractor), and which may therefore be charged directly and in total to that agency. An indirect cost
is one which cannot be so identified, but rather is incurred for the common benefit of the DSS as well as
for other activities carried on by the county. Some obvious examples of such joint-benefit costs would
be: a) finance department operations, including accounts payable, payroll, and purchasing functions; b)
the provision, operation, and maintenance of county government buildings, including the DSS and
related buildings; and c) motor pool operations. In addition to the term "indirect costs", these costs are
more properly called "central supporting services costs", and to claim reimbursement for them, a county must
prepare a cost allocation plan.
Counties now have the options of including all or a part of their cost of space in a county-wide central
supporting services cost allocation plan. Cost of space normally is made up of such costs as utilities,
security and janitorial services, building maintenance costs and depreciation (or use allowances), and such
costs as are usually incidental to rental and lease agreements. The cost of any one of these items can be
directly charged to the appropriate "user" departments, or it can be incorporated into a central
supporting service "cost pool" and allocated on some equitable basis (such as net usable square feet), also to
the appropriate "user" departments. Regardless of the option selected, counties must comply with the
applicable regulations governing cost of space:
1. Costs may not be claimed for buildings that have been or would be considered to be fully depreciated.
2. No part of the cost of land may be claimed.
3. No claim may be made for any portion of the cost of buildings or equipment previously donated or
otherwise borne directly or indirectly by the federal government.
If a private organization donates a building to the county without restrictions, an annual use allocation
(not to exceed 2%) may be claimed on the portion of the building occupied by the DSS. The use
allowance must be based on the fair market value of the donated structure.
4. No claim may be made for the cost of idle, excess, or unoccupied space, except with the prior
written approval of the grantor federal agency.
SOCIAL SERVICES FISCAL MANUAL DETERMINATION OF COST
Section II E
OMB Circular A-87 Date March 31, 2024
II E-2
Basis for an Indirect Cost Plan
Counties must prepare a plan for each and every year for which they wish to claim indirect costs. The
figures used as the basis for the calculations must be the actual costs of the most recent fiscal year for which
they are available. Generally, the source of these figures will be the independent CPA report for the fiscal year
immediately preceding the fiscal year during which the plan is prepared.
Certifying the Indirect Cost Plan's Existence
Also, for each and every year for which a county wishes to claim indirect costs, they must certify to the
Controller, Department of Health and Human Services that a plan has been completed and is on file in
the county. The certification should take substantially the following form: (i.e. for SFY 23-24)
Pursuant to the Social Services Fiscal Manual, you are hereby informed that we have completed our
cost allocation plan, prepared in accordance with OMB A-87, for the fiscal year ending June 30, 2022. The
final indirect cost for the Department of Social Services (i.e. Child Support, Native American County) for fiscal
year 22 is $X,XXX,XXX; the roll forward adjustment is $XXX,XXX and costs to be claimed are $X,XXX,XXX .
We are using a roll forward method of indirect cost computations. Therefore, no rate adjustments will
be claimed during the present fiscal year (22-23). The roll forward amount due us has been rolled forward
into the FY 23-24 rate request, which will be claimed commencing July 1, 2023. The attached schedules reflect
the proposed FY 23-24 claim.
County Finance Officer/County Manager: _______________________________________
County DSS Director: ________________________________________
As shown, the certification should be signed by both the County Finance Officer/County Manager and the
County Director and should then be mailed to the County Administration Accounting Unit, Controller’s
Office, 2019 Mail Service Center; Raleigh, North Carolina 27699-2019. It is required that an applicable plan
be completed and on file as of the time a claim is submitted for reimbursement. This certification should
therefore be furnished as soon as the county's annual plan is completed, but in no event later than April
15th following the state fiscal year in which reimbursement is being claimed (ex. SFY 22-23 by
4/15/2023).
Reconciling Projected Indirect Costs to Actual
Much of the indirect cost plan methodology currently in use culminates in a projection of current or future
period costs based on the verified actual costs of a prior period. In such cases, the projected costs must be
reconciled to actual when the actual costs become known, and counties are therefore reminded to provide for a
mechanism to accomplish this requirement.
When county owned buildings, capital improvements, and/or equipment items are used on behalf of social
services programs, counties are entitled to compensation for such use by means of use allowances or
depreciation. In the case of use allowances (2% annually for buildings, 6.67% for equipment) the appropriate
annual allowance for a given item may be claimed each year, irrespective of the total amount that may have
been claimed for preceding years. In the case of depreciation, however, the amounts claimed by the county are
considered to apply toward the amortization of the item's acquisition cost and are therefore subject to certain
limits and controls. Foremost among these controls is the requirement that appropriate property records be
SOCIAL SERVICES FISCAL MANUAL DETERMINATION OF COST
Section II E
OMB Circular A-87 Date March 31, 2024
II E-3
maintained, so as to insure that the acquisition cost of each item is amortized over an acceptable period,
and that the amount amortized does not actually exceed the item's acquisition cost. The following policies
apply:
All asset depreciation charges claimed against social services programs must be supported by formal
depreciation schedules. If these charges are identified by means of a central supporting services cost
allocation plan, the depreciation schedules must henceforth be incorporated into the formal plan, and must
include the following information for each asset item:
1. A description of the asset.
2. Date of acquisition (at a minimum, the month and year).
3. Net acquisition cost of the asset.
4. Useful life. This should be in accordance with applicable industry or IRS Guidelines, unless
considerable justification can be provided for using an alternate span. The useful life of vehicles must
be in accordance with OSBM guidelines (110,000 miles).
5. Depreciation methodology. (Currently, straight-line is the only permissible method.) Useful life
should be followed when relating to vehicle purchases.
6. Total amount of depreciation taken in previous periods.
7. Amount of depreciation being taken in the current period.
8. Combined total of depreciation taken in previous and current periods.
9. Remaining undepreciated (net book) value.
Reporting the Indirect Costs - Indirect costs should be reported on the Statement of Administrative
Expenditures, Form DSS-1571, Part II. Because of considerations involving the Division's draw down of
Federal funds, counties must report their indirect cost in monthly increments.
Counties are cautioned that, with these as with other expenditure reportings, reimbursement by the Division
does not constitute final acceptance or endorsement of the methodology used in preparing a plan. If upon audit
or otherwise, it is determined that the costs do not meet the requirements specified in the applicable cost
principles (such as reasonableness and necessity), the costs may be disallowed.
If there are questions about indirect cost plans, please call the Controller’s Office (919) 527-6150.
SECTION
II-F
SOCIAL SERVICES FISCAL MANUAL DETERMINATION OF COST
Section II F
OMB Circular A-87 Date March 31, 2024
II F-1
Section II-F OMB Circular A-87 Selected Items of Cost
l. Purpose This Circular establishes principles and standards for determining costs for Federal
awards carried out through grants, cost reimbursement contracts, and other agreements with State
and local governments and federally-recognized Native American tribal governments (governmental
units).
2. Authority This Circular is issued under the authority of the Budget and Accounting Act of
1921, as amended; the Budget and Accounting Procedures Act of 1950, as amended; the Chief
Financial Officers Act of 1990; Reorganization Plan No. 2 of 1970; and Executive Order No. 11541
("Prescribing the Duties of the Office of Management and Budget and the Domestic Policy Council
in the Executive Office of the President.")
3. Background An interagency task force was established in 1987 to review existing cost
principles for Federal awards to State, local, and Native American tribal governments. The task
force studied Inspector General Reports and recommendations, solicited suggestions for changes to
the Circular from governmental units, and compared for consistency the provisions of other OMB
cost principles circulars covering non-profit organizations and universities. A proposed revised
Circular reflecting the results of those efforts was issued on October 12, 1988, and August 19, 1993.
Extensive comments on the proposed revisions, discussions with interest groups, and related
developments were considered in developing this revision.
4. Rescissions This Circular rescinds and supersedes Circular A-87, issued January 15, 1981.
5. Policy This Circular establishes principles and standards to provide a uniform approach for
determining costs and to promote effective program delivery, efficiency, and better relationships
between governmental units and the Federal Government. The principles are for determining
allowable costs only. They are not intended to identify the circumstances or to dictate the extent of
Federal and governmental unit participation in the financing of a particular Federal award. Provision
for profit or other increment above cost is outside the scope of this Circular.
6. Definitions Definitions of key terms used in this Circular are contained in Attachment A,
Section B.
7. Required Action Agencies responsible for administering programs that involve cost
reimbursement contracts, grants, and other agreements with governmental units shall issue
codified regulations to implement the provisions of this Circular and its Attachments by
September 1, 1995.
8. OMB Responsibilities The Office of Management and Budget (OMB) will review agency
regulations and implementation of this Circular, and will provide policy interpretations and
assistance to insure effective and efficient implementation. Any exceptions will be subject to
approval by OMB. Exceptions will only be made in particular cases where adequate justification is
presented.
SOCIAL SERVICES FISCAL MANUAL DETERMINATION OF COST
Section II F
OMB Circular A-87 Date March 31, 2024
II F-2
9. Information Contact Further information concerning this Circular may be obtained by
contacting the Office of Federal Financial Management, Financial Standards and Reporting Branch,
Office of Management and Budget, Washington, DC 20503, telephone 202-395-3993.
10. Policy Review Date OMB Circular A-87 will have a policy review three years from the date
of issuance.
11. Effective Date This Circular is effective as follows:
• For costs charged indirectly or otherwise covered by the cost allocation plans
described in Attachments C, D, and E, this revision shall be applied to cost allocation
plans and indirect cost proposals submitted or prepared for a governmental unit's
fiscal year that begins on or after September 1, 1995.
• For other costs, this revision shall be applied to all awards or amendments, including
continuation or renewal awards, made on or after September 1, 1995.
SOCIAL SERVICES FISCAL MANUAL DETERMINATION OF COST
Section II F
OMB Circular A-87 Date March 31, 2024
II F-3
OMB CIRCULAR NO. A-87
COST PRINCIPLES FOR
STATE, LOCAL AND NATIVE AMERICAN TRIBAL GOVERNMENTS
TABLE OF CONTENTS
Attachment A - General Principles for Determining Allowable Costs
Attachment B - Selected Items of Cost
Attachment C - State/Local-Wide Central Service Cost Allocation Plans
Attachment D - Public Assistance Cost Allocation Plans
Attachment E - State and Local Indirect Cost Rate Proposals
SOCIAL SERVICES FISCAL MANUAL DETERMINATION OF COST
Section II F
OMB Circular A-87 Date March 31, 2024
II F-4
Circular No. A-87
Attachment A
GENERAL PRINCIPLES FOR DETERMINING
ALLOWABLE COSTS
TABLE OF CONTENTS
A. Purpose and Scope
1. Objectives
2. Policy guides
3. Application
B. Definitions
1. Approval or authorization of the awarding or cognizant Federal agency
2. Award
3. Awarding agency
4. Central service cost allocation plan
5. Claim
6. Cognizant agency
7. Common rule
8. Contract
9. Cost
10. Cost allocation plan
11. Cost objective
12. Federally-recognized Native American tribal government
13. Governmental unit
14. Grantee department or agency
15. Indirect cost rate proposal
16. Local government
17. Public assistance cost allocation plan
18. State
C. Basic Guidelines
1. Factors affecting allowability of costs
2. Reasonable costs
3. Allocable costs
4. Applicable credits
D. Composition of Cost
1. Total cost
2. Classification of costs
E. Direct Costs
1. General
2. Application
3. Minor items
SOCIAL SERVICES FISCAL MANUAL DETERMINATION OF COST
Section II F
OMB Circular A-87 Date March 31, 2024
II F-5
F. Indirect Costs
1. General,
2. Cost allocation plans and indirect cost proposals
3. Limitation on indirect or administrative costs
G. Interagency Services
H. Required Certifications
SOCIAL SERVICES FISCAL MANUAL DETERMINATION OF COST
Section II F
OMB Circular A-87 Date March 31, 2024
II F-6
A. Purpose and Scope
1. Objectives
This Attachment establishes principles for determining the allowable costs incurred by
State, local, and federally-recognized Native American tribal governments (governmental
units) under grants, cost reimbursement contracts, and other agreements with the Federal
Government (collectively referred to in this Circular as "Federal awards"). The principles
are for the purpose of cost determination and are not intended to identify the circumstances
or dictate the extent of Federal or governmental unit participation in the financing of a
particular program or project. The principles are designed to provide that Federal awards
bear their fair share of cost recognized under these principles except where restricted or
prohibited by law. Provision for profit or other increment above cost is outside the scope of
this Circular.
2. Policy guides
a. The application of these principles is based on the fundamental premises that:
(1) Governmental units are responsible for the efficient and effective
administration of Federal awards through the application of sound
management practices.
(2) Governmental units assume responsibility for administering Federal funds in
a manner consistent with underlying agreements, program objectives, and
the terms and conditions of the Federal award.
(3) Each governmental unit, in recognition of its own unique combination of
staff, facilities, and experience, will have the primary responsibility for
employing whatever form of organization and management techniques may
be necessary to assure proper and efficient administration of Federal awards.
b. Federal agencies should work with States or localities which wish to test alternative
mechanisms for paying costs for administering Federal programs. The Office of
Management and Budget (OMB) encourages Federal agencies to test fee-for-service
alternatives as a replacement for current cost-reimbursement payment methods in
response to the National Performance Review's (NPR) recommendation. The NPR
recommended the fee-for-service approach to reduce the burden associated with
maintaining systems for charging administrative costs to Federal programs and
preparing and approving cost allocation plans. This approach should also increase
incentives for administrative efficiencies and improve outcomes.
3. Application.
a. These principles will be applied by all Federal agencies in determining costs
incurred by governmental units under Federal awards (including sub-awards) except
SOCIAL SERVICES FISCAL MANUAL DETERMINATION OF COST
Section II F
OMB Circular A-87 Date March 31, 2024
II F-7
those with (1) publicly-financed educational institutions subject to OMB Circular A-
21, "Cost Principles for Educational Institutions," and (2) programs administered by
publicly-owned hospitals and other providers of medical care that are subject to
requirements promulgated by the sponsoring Federal agencies. However, this
Circular does apply to all central service and department/agency costs that are
allocated or billed to those educational institutions, hospitals, and other providers of
medical care or services by other State and local government departments and
agencies.
b. All sub-awards are subject to those Federal cost principles applicable to the
particular organization concerned. Thus, if a sub ward is to a governmental unit
(other than a college, university or hospital), this Circular shall apply; if a sub-award
is to a commercial organization, the cost principles applicable to commercial
organizations shall apply; if a sub-award is to a college or university, Circular A-2 1
shall apply; if a sub-ward is to a hospital, the cost principles used by the Federal
awarding agency for awards to hospitals shall apply, subject to the provisions of
subsection A-3 of this Attachment; if a sub-award is to some other non-profit
organization, Circular A-122, "Cost Principles for Non-Profit Organizations," shall
apply.
c. These principles shall be used as a guide in the pricing of fixed price arrangements
where costs are used in determining the appropriate price.
d. Where a Federal contract awarded to a governmental unit incorporates a Cost
Accounting Standards (CAS) clause, the requirements of that clause shall apply. In
such cases, the governmental unit and the cognizant Federal agency shall establish
an appropriate advance agreement on how the governmental unit will comply with
applicable CAS requirements when estimating, accumulating and reporting costs
under CAS-covered contracts. The agreement shall indicate that OMB Circular A-87
requirements will be applied to other Federal awards. In all cases, only one set of
records needs to be maintained by the governmental unit.
B. Definitions
1. "Approval or authorization of the awarding or cognizant Federal agency" means
documentation evidencing consent prior to incurring a specific cost. If such costs are
specifically identified in a Federal award document, approval of the document constitutes
approval of the costs. If the costs are covered by a State/local-wide cost allocation plan or an
indirect cost proposal, approval of the plan constitutes the approval.
2. "Award" means grants, cost reimbursement contracts and other agreements between a State,
local and Native American tribal government and the Federal Government.
SOCIAL SERVICES FISCAL MANUAL DETERMINATION OF COST
Section II F
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II F-8
3. "Awarding agency" means (a) with respect to a grant, cooperative agreement, or cost
reimbursement contract, the Federal agency, and (b) with respect to a sub-award, the party
that awarded the sub a.
4. "Central service cost allocation plan" means the documentation identifying, accumulating,
and allocating or developing billing rates based on the allowable costs of services provided
by a governmental unit on a centralized basis to its departments and agencies. The costs of
these services may be allocated or billed to users.
5. "Claim" means a written demand or written assertion by the governmental unit or grantor
seeking, as a matter of right, the payment of money in a sum certain, the adjustment or
interpretation of award terms, or other relief arising under or relating to the award. A
voucher, invoice or other routine request for payment that is not a dispute when submitted is
not a claim. Appeals, such as those filed by a governmental unit in response to questioned
audit costs, are not considered claims until a final management decision is made by the
Federal awarding agency.
6. "Cognizant agency" means the Federal agency responsible for reviewing, negotiating, and
approving cost allocation plans or indirect cost proposals developed under this Circular on
behalf of all Federal agencies. OMB publishes a listing of Cognizant agencies.
7. "Common Rule" means the "Uniform Administrative Requirements for Grants and
Cooperative Agreements to State and Local Governments; Final Rule" originally issued at
53 FR 8034-8103 (March 11, 1988). Other common rules will be referred to by their
specific titles.
8. "Contract" means a mutually binding legal relationship obligating the seller to furnish the
supplies or services (including construction) and the buyer to pay for them. It includes all
types of commitments that obligate the government to an expenditure of appropriated funds
and that, except as otherwise authorized, are in writing. In addition to bilateral instruments,
contracts include (but are not limited to): awards and notices of awards; job orders or task
orders issued under basic ordering agreements; letter contracts; orders, such as purchase
orders, under which the contract becomes effective by written acceptance or performance;
and, bilateral contract modifications. Contracts do not include grants and cooperative
agreements covered by 31 U.S.C. 6301 et seq.
9. "Cost" means an amount as determined on cash, accrual or other basis acceptable to the
Federal awarding or Cognizant agency. It does not include transfers to a general or similar
fund.
10. "Cost allocation plan" means central service cost allocation plan, public assistance cost
allocation plan, and indirect cost rate proposal. Each term is further defined in this section.
11. ''Cost objective" means a function, an organizational subdivision, a contract, a grant or any
other activity for which cost data is needed and for which costs are incurred.
SOCIAL SERVICES FISCAL MANUAL DETERMINATION OF COST
Section II F
OMB Circular A-87 Date March 31, 2024
II F-9
12. "Federally-recognized Native American tribal government" means the governing body or a
governmental agency of any Native American tribe, band, nation, or other organized group
or community (including any native village as defined in Section 3 of the Alaska Native
Claims Settlement Act, 85 Stat. 688) certified by the Secretary of the Interior as eligible for
the special programs and services provided through the Bureau of Native American Affairs.
13. "Governmental unit" means the entire State, local, or federally-recognized Native American
tribal government, including any component thereof. Components of governmental units
may function independently of the governmental unit in accordance with the term of the
award.
14. "Grantee department or agency" means the component of a State, local, or federally-
recognized Native American tribal government which is responsible for the performance or
administration of all or some part of a Federal award.
15. "Indirect cost rate proposal" means the documentation prepared by a governmental unit or
component thereof to substantiate its request for the establishment of an indirect cost rate as
described in Attachment E of this Circular.
16. "Local government" means a county, municipality, city, town, township, local public
authority, school district, special district, intrastate district, council of governments (whether
or not incorporated as a non-profit corporation under State law), any other regional or
interstate government entity, or any agency or instrumentality of a local government.
17. "Public assistance cost allocation plan" means a narrative description of the procedures that
will be used in identifying, measuring and allocating all administrative costs to all of the
programs administered or supervised by State public assistance agencies as described in
Attachment D of this Circular.
18. "State" means any of the several States of the United States, the District of Columbia, the
Commonwealth of Puerto Rico, any territory or possession of the United States, or any
agency or instrumentality of a State exclusive of local governments.
C. Basic Guidelines
1. Factors affecting allowability of costs. To be allowable under Federal awards, costs must
meet the following criteria:
a. Be necessary and reasonable for proper and efficient performance and
administration of Federal awards.
b. Be allocable to Federal awards under the provisions of this Circular.
c. Be authorized or not prohibited under State and local laws or regulations.
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d. Conform to any limitations or exclusions set forth in these principles, Federal laws,
terms and conditions of the Federal award, or other governing regulations as to types
or amounts of cost items.
e. Be consistent with policies, regulations, and procedures that apply uniformly to both
Federal awards and other activities of the governmental unit.
f. Be accorded consistent treatment. A cost may not be assigned to a Federal award as
a direct cost if any other cost incurred for the same purpose in like circumstances
has been allocated to the Federal award as an indirect cost.
g. Except as otherwise provided for in this Circular, be determined in accordance with
generally accepted accounting principles.
h. Not be included as a cost or used to meet cost sharing or matching requirements of
any other Federal award in either the current or a prior period, except as specifically
provided by Federal law or regulation.
i. Be the net of all applicable credits.
j. Be adequately documented.
2. Reasonable costs. A cost is reasonable if, in its nature and amount, it does not exceed that
which would be incurred by a prudent person under the circumstances prevailing at the time
the decision was made to incur the cost. The question of reasonableness is particularly
important when governmental units or components are predominately federally-funded. In
determining reasonableness of a given cost, consideration shall be given to:
a. Whether the cost is of a type generally recognized as ordinary and necessary for the
operation of the governmental unit or the performance of the Federal award.
b. The restraints or requirements imposed by such factors as: sound business practices;
arms length bargaining; Federal, State and other laws and regulations; and, terms
and conditions of the Federal award.
c. Market prices for comparable goods or services.
d. Whether the individuals concerned acted with prudence in the circumstances
considering their responsibilities to the governmental unit, its employees, the public
at large, and the Federal Government.
e. Significant deviation from the established practices of the governmental unit which
may unjustifiably increase the Federal award's cost.
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3. Allocable costs.
a. A cost is allocable to a particular cost objective if the goods or services involved are
chargeable or assignable to such cost objective in accordance with relative benefits
received.
b. All activities which benefit from the governmental unit's indirect cost, including
unallowable activities and services donated to the governmental unit by third parties,
will receive an appropriate allocation of indirect costs.
c. Any cost allocable to a particular Federal award or cost objective under the
principles provided for in this Circular may not be charged to other Federal awards
to overcome fund deficiencies, to avoid restrictions imposed by law or terms of the
Federal awards, or for other reasons. However, this prohibition would not preclude
governmental units from shifting costs that are allowable under two or more awards
in accordance with existing program agreements.
d. Where an accumulation of indirect costs will ultimately result in charges to a
Federal award, a cost allocation plan will be required as described in Attachments C,
D, and E.
4. Applicable credits.
a. Applicable credits refer to those receipts or reduction of expenditure-type
transactions that offset or reduce expense items allocable to Federal awards as direct
or indirect costs. Examples of such transactions are: purchase discounts, rebates or
allowances, recoveries or indemnities on losses, insurance refunds or rebates, and
adjustments of overpayments or erroneous charges. To the extent that such credits
accruing to or received by the governmental unit relate to allowable costs, they shall
be credited to the Federal award either as a cost reduction or cash refund, as
appropriate.
b. In some instances, the amounts received from the Federal Government to finance
activities or service operations of the governmental unit should be treated as
applicable credits. Specifically, the concept of netting such credit items (including
any amounts used to meet cost sharing or matching requirements) should be
recognized in determining the rates or amounts to be charged to Federal awards.
(See Attachment B. item 15, "Depreciation and use allowances," for areas of
potential application in the matter of Federal financing of activities.)
D. Composition of Cost
1. Total cost. The total cost of Federal awards is comprised of the allowable direct cost of the
program, plus its allocable portion of allowable indirect costs, less applicable credits.
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2. Classification of costs. There is no universal rule for classifying certain costs as either direct
or indirect under every accounting system. A cost may be direct with respect to some
specific service or function, but indirect with respect to the Federal award or other final cost
objective. Therefore, it is essential that each item of cost be treated consistently in like
circumstances either as a direct or an indirect cost. Guidelines for determining direct and
indirect costs charged to Federal awards are provided in the sections that follow.
E. Direct Costs
1. General. Direct costs are those that can be identified specifically with a particular final cost
objective.
2. Application. Typical direct costs chargeable to Federal awards are:
a. Compensation of employees for the time devoted and identified specifically to the
performance of those awards.
b. Cost of materials acquired, consumed, or expended specifically for the purpose of
those awards.
c. Equipment and other approved capital expenditures.
d. Travel expenses incurred specifically to carry out the award.
3. Minor items. Any direct cost of a minor amount may be treated as an indirect cost for
reasons of practicality where such accounting treatment for that item of cost is consistently
applied to all cost objectives.
F. Indirect Costs
1. General. Indirect costs are those: (a) incurred for a common or joint purpose benefiting
more than one cost objective, and (b) not readily assignable to the cost objectives
specifically benefited, without effort disproportionate to the results achieved. The term
"indirect costs," as used herein, applies to costs of this type originating in the grantee
department, as well as those incurred by other departments in supplying goods, services, and
facilities. To facilitate equitable distribution of indirect expenses to the cost objectives
served, it may be necessary to establish a number of pools of indirect costs within a
governmental unit department or in other agencies providing services to a governmental unit
department. Indirect cost pools should be distributed to benefited cost objectives on bases
that will produce an equitable result in consideration of relative benefits derived.
2. Cost allocation plans and indirect cost proposals. Requirements for development and
submission of cost allocation plans and indirect cost rate proposals are contained in
Attachments C, D, and E.
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3. Limitation on indirect or administrative costs.
a. In addition to restrictions contained in this Circular, there may be laws that further
limit the amount of administrative or indirect cost allowed.
b. Amounts not recoverable as indirect costs or administrative costs under one Federal
award may not be shifted to another Federal award, unless specifically authorized by
Federal legislation or regulation.
G. Interagency Services.
The cost of services provided by one agency to another within the governmental unit may include
allowable direct costs of the service plus a pro rate share of indirect costs. A standard indirect cost
allowance equal to ten percent of the direct salary and wage cost of providing the service (excluding
overtime, shift premiums, and fringe benefits) may be used in lieu of determining the actual indirect
costs of the service. These services do not include centralized services included in central service
cost allocation plans as described in Attachment C.
H. Required Certifications.
Each cost allocation plan or indirect cost rate proposal required by Attachments C and E must
comply with the following:
1. No proposal to establish a cost allocation plan or an indirect cost rate, whether submitted to
a Federal cognizant agency or maintained on file by the governmental unit, shall be
acceptable unless such costs have been certified by the governmental unit using the
Certificate of Cost Allocation Plan or Certificate of Indirect Costs as set forth in
Attachments C and E. The certificate must be signed on behalf of the governmental unit by
an individual at a level no lower than chief financial officer of the governmental unit that
submits the proposal or component covered by the proposal.
2. No cost allocation plan or indirect cost rate shall be approved by the Federal Government
unless the plan or rate proposal has been certified. Where it is necessary to establish a cost
allocation plan or an indirect cost rate and the governmental unit has not submitted a
certified proposal for establishing such a plan or rate in accordance with the requirements,
the Federal Government may either disallow all indirect costs or unilaterally establish such a
plan or rate Such a plan or rate may be based upon audited historical data or such other data
that have been furnished to the cognizant Federal agency and for which it can be
demonstrated that all unallowable costs have been excluded. When a cost allocation plan or
indirect cost rate is unilaterally established by the Federal Government because of failure of
the governmental unit to submit a certified proposal, the plan or rate established will be set
to ensure that potentially unallowable costs will not be reimbursed.
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Circular No. A-87
Attachment B
SELECTED ITEMS OF COST
TABLE OF CONTENTS
1. Accounting
2. Advertising and public relations costs
3. Advisory councils
4. Alcoholic beverages
5. Audit services
6. Automatic electronic data processing
7. Bad debts
8. Bonding costs
9. Budgeting
10. Communications
11. Compensation for personnel-services
a. General
b. Reasonableness
c. Unallowable costs
d. Fringe benefits
e. Pension plan costs
f. Post-retirement health benefits
g. Severance Pay
h. Support of salaries and wages
i. Donated Services
12. Contingencies
13. Contributions and donations
14. Defense and prosecution of criminal and civil proceedings, and claims
15. Depreciation and use allowances
16. Disbursing service
17. Employee morale, health, and welfare costs
18. Entertainment
19. Equipment and other capital expenditures
20. Fines and penalties
21. Fund raising and investment management costs
22. Gains and losses on disposition of depreciable property and other capital assets
and substantial relocation of Federal programs.
23. General government expenses
24. Idle facilities and idle capacity
25. Insurance and indemnification
26. Interest
27. Lobbying
28. Maintenance, operations, and repairs
29. Materials and supplies
30. Memberships, subscriptions, and professional activities
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31. Motor pools
32. Pre-award costs
33. Professional service costs
34. Proposal costs
35. Publication and printing costs
36. Rearrangements and alterations
37. Reconversion costs
38. Rental costs
39. Taxes
40. Training
41. Travel costs
42. Underrecovery of costs under Federal agreements
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Sections 1 through 42 provide principles to be applied to establishing the allowability or unallowability of
certain items of cost. These principles apply whether a cost is treated as direct or indirect. A cost is
allowable for Federal reimbursement only to the extent of benefits received by Federal awards and its
conformance with the general policies and principles stated in Attachment A to this Circular. Failure to
mention a particular item of cost in these sections is not intended to imply that it is either allowable or
unallowable; rather, determination of allowability in each case should be based on the treatment or
standards provided for similar or related items of cost.
1. Accounting The cost of establishing and maintaining accounting and other information systems is
allowable.
2. Advertising and public relations costs.
a. The term "advertising costs" means the costs of advertising media and corollary
administrative costs. Advertising media include magazines, newspapers, radio and
television programs, direct mail, exhibits, and the like.
b. The term "public relations" includes community relations and means those activities
dedicated to maintaining the image of the governmental unit or maintaining or promoting
understanding and favorable relations with the community or public at large or any segment
of the public.
c. Advertising costs are allowable only when incurred for the recruitment of personnel, the
procurement of goods and services, the disposal of surplus materials, and any other specific
purposes necessary to meet the requirements of the Federal award. Advertising costs
associated with the disposal of surplus materials are not allowable where all disposal costs
are reimbursed based on a standard rate as specified in the grants management common rule.
d. Public relations costs are allowable when:
(1) Specifically required by the Federal award and then only as a direct cost;
(2) Incurred to communicate with the public and press pertaining to specific activities or
accomplishments that result from performance of the Federal award and then only as
a direct cost; or
(3) Necessary to conduct general liaison with news media and government public
relations officers, to the extent that such activities are limited to communication and
liaison necessary to keep the public informed on matters of public concern, such as
notices of Federal contract/grant awards, financial matters, etc.
e. Unallowable advertising and public relations costs include the following:
(1) All advertising and public relations cost other than specified in subsections c. and d.
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(2) Except as otherwise permitted by these cost principles, costs of conventions,
meetings, or other events related to other activities of the governmental unit
including:
(a) Costs of displays, demonstrations, and exhibits;
(b) Costs of meeting rooms, hospitality suites, and other special facilities used in
conjunction with shows and other special events; and
(c) Salaries and wages of employees engaged in setting up and displaying
exhibits, making demonstrations, and providing briefings;
(3) Costs of promotional items and memorabilia, including models, gifts, and souvenirs;
(4) Costs of advertising and public relations designed solely to promote the
governmental unit.
3. Advisory councils Costs incurred by advisory councils or committees are allowable as a direct cost
where authorized by the Federal awarding agency or as an indirect cost where allocable to Federal
awards.
4. Alcoholic beverages Costs of alcoholic beverages are unallowable.
5. Audit services The costs of audits are allowable provided that the audits were performed in
accordance with the Single Audit Act, as implemented by Circular A-128, "Audits of State and
Local Governments." Generally, the percentage of costs charged to Federal awards for a single audit
shall not exceed the percentage derived by dividing Federal funds expended by total funds expended
by the recipient or subrecipient (including program matching funds) during the fiscal year. The
percentage may be exceeded only if appropriate documentation demonstrates higher actual costs.
Other audit costs are allowable if specifically approved by the awarding or cognizant agency as a
direct cost to an award or included as an indirect cost in a cost allocation plan or rate.
6. Automatic electronic data processing The cost of data processing services is allowable (but see
section 19, Equipment and other capital expenditures).
7. Bad debts Any losses arising from uncollectible accounts and other claims, and related costs, are
unallowable unless provided for in Federal program award regulations.
8. Bonding costs Costs of bonding employees and officials are allowable to the extent that such
bonding is in accordance with sound business practice.
9. Budgeting Costs incurred for the development, preparation, presentation, and execution of budgets
are allowable.
10. Communications Costs of telephones mail, messenger, and similar communication services are
allowable.
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11. Compensation for personnel services
a. General. Compensation for personnel services includes all remuneration, paid currently or
accrued, for services rendered during the period of performance under Federal awards,
including but not necessarily limited to wages, salaries and fringe benefits. The costs of
such compensation are allowable to the extent that they satisfy the specific requirements of
this Circular and that the total compensation for individual employees:
(1) Are reasonable for the services rendered and conforms to the established policy of
the governmental unit consistently applied to both Federal and non-Federal activities
(2) Follows an appointment made in accordance with a governmental unit's laws and
rules and meets merit system or other requirements required by Federal law, where
applicable
(3) Is determined and supported as provided in subsection h.
b. Reasonableness. Compensation for employees engaged in work on Federal awards will be
considered reasonable to the extent that it is consistent with that paid for similar work in
other activities of the governmental unit. In cases where the kinds of employees required
for Federal awards are not found in the other activities of the governmental unit,
compensation will be considered reasonable to the extent that it is comparable to that paid
for similar work in the labor market in which the employing government competes for the
kind of employees involved. Compensation surveys providing data representative of the
labor market involved will be an acceptable basis for evaluating reasonableness.
c. Unallowable costs. Costs which are unallowable under the sections of these principles shall
not be allowable under this section solely on the basis that they constitute personnel
compensation.
d. Fringe benefits.
(1) Fringe benefits are allowances and services provided by employers to their
employees as compensation in addition to regular salaries and wages. Fringe-
benefits include, but are not limited to, the costs of leave, employee insurance,
pensions, and unemployment benefit plans. Except as provided elsewhere in these
principles, the costs of fringe benefits are allowable to the extent that the benefits are
reasonable and are required by law, governmental unit-employee agreement, or an
established policy of the governmental unit.
(2) The cost of fringe benefits in the form of regular compensation paid to employees
during periods of authorized absences from the job, such as for annual leave, sick
leave, holidays, court leave, military leave, and other similar benefits, are allowable
if: (a) they are provided under established written leave policies; (b) the costs are
equitably allocated to all related activities, including Federal awards; and, (c) the
accounting basis (cash or accrual) selected for costing each type of leave is
consistently followed by the governmental unit.
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(3) When a governmental unit uses the cash basis of accounting, the cost of leave is
recognized in the period that the leave is taken and paid for. Payments for unused
leave when an employee retires or terminates employment are allowable in the year
of payment provided they are allocated as a general administrative expense to all
activities of the governmental unit or component.
(4) The accrual basis may be only used for those types of leave for which a liability as
defined by Generally Accepted Accounting Principles (GAAP) exists when the
leave is earned. When a governmental unit uses the accrual basis of accounting, in
accordance with GAAP, allowable leave costs are the lesser of the amount accrued
or funded.
(5) The cost of fringe benefits in the form of employer contributions or expenses for
social security; employee life, health, unemployment, and worker's compensation
insurance (except as indicated in section 25, Insurance and indemnification);
pension plan costs (see subsection e.); and other similar benefits are allowable,
provided such benefits are granted under established written policies. Such benefits,
whether treated as indirect costs or as direct costs, shall be allocated to Federal
awards and all other activities in a manner consistent with the pattern of benefits
attributable to the individuals or group(s) of employees whose salaries and wages
are chargeable to such Federal awards and other activities.
e. Pension plan costs may be computed using a pay-as-you-go method or an acceptable
actuarial cost method in accordance with established written policies of the governmental
unit.
(1) For pension plans financed on a pay-as-you-go method, allowable costs will be
limited to those representing actual payments to retirees or their beneficiaries.
(2) Pension costs calculated using an actuarial cost-based method recognized by GAAP
are allowable for a given fiscal year if they are funded for that year within six
months after the end of that year. Costs funded after the six month period (or a later
period agreed to by the Cognizant agency) are allowable in the year funded. The
Cognizant agency may agree to an extension of the six month period if an
appropriate adjustment 1S made to compensate for the timing of the charges to the
Federal Government and related Federal reimbursement and the governmental unit's
contribution to the pension fund. Adjustments may be made by cash refund or other
equitable procedures to compensate the Federal Government for the time value of
Federal reimbursements in excess of contributions to the pension fund.
(3) Amounts funded by the governmental unit in excess of the actuarially determined
amount for a fiscal year may be used as the governmental unit's contribution in
future periods.
(4) When a governmental unit converts to an acceptable actuarial cost method, as
defined by GAAP, and funds pension costs in accordance with this method, the
unfunded liability at the time of conversion shall be allowable if amortized over a
period of years in accordance with GAAP.
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(5) The Federal Government shall receive an equitable share of any previously allowed
pension costs (including earnings thereon) which revert or inure to the governmental
unit in the form of a refund, withdrawal, or other credit.
f. Post-retirement health benefits. Post-retirement health benefits (PRHB) refers to costs of
health insurance or health services not included in a pension plan covered by subsection e.
for retirees and their spouses, dependents, and survivors. PRHB costs may be computed
using a pay-as-you-go method or an acceptable actuarial cost method in accordance with
established written policies of the governmental unit.
(1) For PRHB financed on a pay as-you-go method, allowable costs will be limited to
those representing actual payments to retirees or their beneficiaries.
(2) PRHB costs calculated using an actuarial cost method recognized by GAAP is
allowable if they are funded for that year within six months after the end of that
year. Costs funded after the six month period (or a later period agreed to by the
Cognizant agency) are allowable in the year funded. The Cognizant agency may
agree to an extension of the six month period if an appropriate adjustment is made to
compensate for the timing of the charges to the Federal Government and related
Federal reimbursements and the governmental unit's contributions to the PRHB
fund. Adjustments may be made by cash refund, reduction in current year's PRHB
costs, or other equitable procedures to compensate the Federal Government for the
time value of Federal reimbursements in excess of contributions to the PRHB fund.
(3) Amounts funded in excess of the actuarially determined amount for a fiscal year
may be used as the government's contribution in a future period.
(4) When a governmental unit converts to an acceptable actuarial cost method and funds
PRHB costs in accordance with this method, the initial unfunded liability
attributable to prior years shall be allowable if amortized over a period of years in
accordance with GAAP, or, if no such GAAP period exists, over a period negotiated
with the Cognizant agency.
(5) To be allowable in the current year, the PRHB costs must be paid either to:
(a) An insurer or other benefit provider as current year costs or premiums or
(b) An insurer or trustee to maintain a trust fund or reserve for the sole purpose
of providing post-retirement benefits to retirees and other beneficiaries.
(6) The Federal Government shall receive an equitable share of any amounts of
previously allowed post-retirement benefit costs (including earnings thereon) which
revert or inure to the governmental unit in the form of a refund, withdrawal, or other
credit.
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g. Severance pay
(1) Payments in addition to regular salaries and wages made to workers whose
employment is being terminated are allowable to the extent that, in each case, they
are required by (a) law, (b) employer-employee agreement, or (c) established written
policy.
(2) Severance payments (but not accruals) associated with normal turnover are
allowable. Such payments shall be allocated to all activities of the governmental unit
as an indirect cost.
(3) Abnormal or mass severance pay will be considered on a case-by-case basis and is
allowable only if approved by a Federal agency that is cognizant of the law.
h. Support of salaries and wages. These standards regarding time distribution are in addition to
the standards for payroll documentation.
(1) Charges to Federal awards for salaries and wages, whether treated as direct or
indirect costs, will be based on payrolls documented in accordance with generally
accepted practice of the governmental unit and approved by a responsible official(s)
of the governmental unit.
(2) No further documentation is required for the salaries and wages of employees who
work in a single indirect cost activity.
(3) Where employees are expected to work solely on a single Federal award or cost
objective, charges for their salaries and wages will be supported by periodic
certifications that the employees worked solely on that program for the period
covered by the certification. These certifications will be prepared at least semi-
annually and will be signed by the employee or supervisory official having first
hand knowledge of the work performed by the employee.
(4) Where employees work on multiple activities or cost objectives, a distribution of
their salaries or wages will be supported by personnel activity reports or equivalent
documentation which meets the standards in subsection
(5) Unless a statistical sampling system (see subsection (6)) or other substitute system
has been approved by the cognizant Federal agency. Such documentary support will
be required where employees work on:
(a) More than one Federal award
(b) A Federal award and a non-Federal award
(c) An indirect cost activity and a direct cost activity
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(d) Two or more indirect activities which are allocated using different allocation
bases
(e) An unallowable activity and a direct or indirect cost activity
(6) Personnel activity reports or equivalent documentation must meet the following
standards:
(a) They must reflect an after-the-fact distribution of the actual activity of each
employee
(b) They must account for the total activity, for which each employee is
compensated
(c) They must be prepared at least monthly and must coincide with one or more
pay periods
(d) They must be signed by the employee
(e) Budget estimates or other distribution percentages determined before the
services are performed do not qualify as support for charges to Federal
awards but may be used for interim accounting purposes, provided that:
(i) The governmental unit's system for establishing the estimates
produces reasonable approximation of the activity actually
performed
(ii) At least quarterly, comparisons of actual costs to budgeted
distributions based on the monthly activity reports are made. Costs
charges to Federal awards to reflect adjustments made as a result of
the activity actually performed may be recorded annually if the
quarterly comparisons show the differences between budgeted and
actual costs are less than ten percent
(iii) The budget estimates or other distribution percentages are revised at
least quarterly, if necessary, to reflect changed circumstances
(7) Substitute systems for allocating salaries and wages to Federal awards may be used
in place of activity reports. These systems are subject to approval if required by the
Cognizant agency. Such systems may include, but are not limited to, random
moment sampling, case counts, or other quantifiable measures of employee effort.
(a) Substitute systems which use sampling methods (primarily for Aid to
Families with Dependent Children (AFDC), Medicaid, and other public
assistance programs) must meet acceptable statistical sampling standards
including:
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(i) The sampling universe must include all of the employees whose
salaries and wages are to be allocated based on sample results except
as provided in subsection
(ii) The entire time period involved must be covered by the sample
(iii) The results must be statistically valid and applied to the period being
sampled
(b) Allocating charges for the sampled employees' supervisors, clerical and
support staffs, based on the results of the sampled employees, will be
acceptable.
(c) Less than full compliance with the statistical sampling standards noted in
subsection (a) may be accepted by the cognizant agency if it concludes that
the amounts to be allocated to Federal awards will be minimal, or if it
concludes that the system proposed by the governmental unit will result in
lower costs to Federal awards than a system which complies with the
standards.
(8) Salaries and wages of employees used in meeting cost sharing or matching
requirements of Federal awards must be supported in the same manner as those
claimed as allowable costs under Federal awards.
i. Donated services
(1) Donated or volunteer services may be furnished to a governmental unit by
professional and technical personnel, consultants, and other skilled and unskilled
labor. The value of these services is not reimbursable either as a direct or indirect
cost. However, the value of donated services may be used to meet cost sharing or
matching requirements in accordance with the provisions of the Common Rule.
(2) The value of donated services utilized in the performance of a direct cost activity
shall, when material in amount, be considered in the determination of the
governmental unit's indirect costs or rate(s) and, accordingly, shall be allocated a
proportionate share of applicable indirect costs.
(3) To the extent feasible, donated services will be supported by the same methods used
by the governmental unit to support the allocability of regular personnel services.
12. Contingencies Contributions to a contingency reserve or any similar provision made for events the
occurrence of which cannot be foretold with certainty as to time, or intensity, or with an assurance
of their happening, are unallowable. The term "contingency reserve" excludes self-insurance
reserves (see subsection 2~.c), pension plan reserves (see subsection 11.e.), and post-retirement
health and other benefit reserves (see subsection 11.f.) computed using acceptable actuarial cost
methods.
13. Contributions and donations Contributions and donations, including cash, property, and services,
by governmental units to others, regardless of the recipient, are unallowable.
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14. Defense and prosecution of criminal and civil proceedings and claims
a. The following costs are unallowable for contracts covered by 10 U.S.C. 2324(k),
"Allowable costs under defense contracts."
(1) Costs incurred in defense of any civil or criminal fraud proceeding or similar
proceeding (including filing of false certification brought by the United States where
the contractor is found liable or has pleaded nolo contendere to a charge of fraud or
similar proceeding (including filing of a false certification).
(2) Costs incurred by a contractor in connection with any criminal, civil or
administrative proceedings commenced by the United States or a State to the extent
provided in 10 U.S.C. 2324(k).
b. Legal expenses required in the administration of Federal programs are allowable. Legal
expenses for prosecution of claims against the Federal Government are unallowable.
15. Depreciation and use allowances
a. Depreciation and use allowances are means of allocating the cost of fixed assets to periods
benefiting from asset use. Compensation for the use of fixed assets on hand may be made
through depreciation or use allowances. A combination of the two methods may not be used
in connection with a single class of fixed assets (e.g., buildings, office equipment, computer
equipment, etc.) except as provided in subsection g. Except for enterprise funds and internal
service funds that are included as part of a State/local cost allocation plan, classes of assets
shall be determined on the same basis used for the government-wide financial statements.
b. The computation of depreciation or use allowances shall be based on the acquisition cost of
the assets involved. Where actual cost records have not been maintained a reasonable
estimate of the original acquisition cost may be used. The value of an asset donated to the
governmental unit by an unrelated third party shall be its fair market value at the time of
donation. Governmental or quasi-governmental organizations located within the same State
shall not be considered unrelated third parties for this purpose.
c. The computation of depreciation or use allowances will exclude:
(1) The cost of land
(2) Any portion of the cost of buildings and equipment borne by or donated by the
Federal Government irrespective of where title was originally vested or where it
presently resides
(3) Any portion of the cost of buildings and equipment contributed by or for the
governmental unit, or a related donor organization, in satisfaction of a matching
requirement
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d. Where the use allowance method is followed, the use allowance for buildings and
improvements (including land improvements, such as paved parking areas, fences, and
sidewalks) will be computed at an annual rate not exceeding two percent of acquisition
costs. The use allowance for equipment will be computed at an annual rate not exceeding 6
2/3 percent of acquisition cost. When the use allowance method is used for buildings, the
entire building must be treated as a single asset; the building's components (e.g., plumbing
system, heating and air condition, etc.) cannot be segregated from the building's shell. The
two percent limitation, however, need not be applied to equipment which is merely attached
or fastened to the building but not permanently fixed to it and which is used as furnishings
or decorations or for specialized purposes (e.g., dentist chairs and dental treatment units,
counters, laboratory benches bolted to the floor, dishwashers, modular furniture, carpeting,
etc.). Such equipment will be considered as not being permanently fixed to the building if it
can be removed without the destruction of, or need for costly or extensive alterations or
repairs, to the building or the equipment. Equipment that meets these criteria will be subject
to the 6 2/3 percent equipment use allowance limitation.
e. Where the depreciation method is followed, the period of useful service (useful life)
established in each case for usable capital assets must take into consideration such factors as
type of construction, nature of the equipment used, historical usage patterns technological
developments, and the renewal and replacement policies of the governmental unit followed
for the individual items or classes of assets involved. In the absence of clear evidence
indicating that the expected consumption of the asset will be significantly greater in the
early portions than in the later portions of its useful life, the straight line method of
depreciation shall be used. Depreciation methods once used shall not be changed unless
approved by the Federal cognizant or awarding agency. When the depreciation method is
introduced for application to an asset previously subject to a use allowance, the annual
depreciation charge thereon may not exceed the amount that would have resulted had the
depreciation method been in effect from the date of acquisition of the asset. The
combination of use allowances and depreciation applicable to the asset shall not exceed the
total acquisition cost of the asset or fair market value at time of donation.
f. When the depreciation method is used for buildings, a building's shell may be segregated
from the major component of the building (e.g., plumbing system, heating, and air
conditioning system, etc.) and each major component depreciated over its estimated useful
life, or the entire building (i.e., the shell and all components) may be treated as a single asset
and depreciated over a single useful life.
g. A reasonable use allowance may be negotiated for any assets that are considered to be fully
depreciated, after taking into consideration the amount of depreciation - previously charged
to the government, the estimated useful life remaining at the time of negotiation, the effect
of any increased maintenance charges, decreased efficiency due to age, and any other factors
pertinent to the utilization of the asset for the purpose contemplated.
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h. Charges for use allowances or depreciation must be supported by adequate property records.
Physical inventories must be taken at least once every two years (a statistical sampling
approach is acceptable) to ensure that assets exist and are in use. Governmental units will
manage equipment in accordance with State laws and procedures. When the depreciation
method is followed, depreciation records indicating the amount of depreciation taken each
period must also be maintained.
16. Disbursing service The cost of disbursing funds by the Treasurer or other designated officer is
allowable.
17. Employee morale, health and welfare costs The costs of health or first-aid clinics and/or
infirmaries, recreational facilities, employee counseling services, employee information
publications, and any related expenses incurred in accordance with a governmental unit's policy are
allowable. Income generated from any of these activities will be offset against expenses.
18. Entertainment Costs of entertainment, including amusement, diversion, and social activities and
any costs directly associated with such costs (such as tickets to shows or sports events, meals,
lodging, rentals, transportation, and gratuities) are unallowable.
19. Equipment and other capital expenditures
a. As used in this section the following terms have the meaning as set forth below:
(1) "Capital expenditure" means the cost of the asset including the cost to put it in place.
Capital expenditure for equipment means the net invoice price of the equipment,
including the cost of any modifications, attachments, accessories, or auxiliary
apparatus necessary to make it usable for the purpose for which it is acquired.
Ancillary charges, such as taxes, duties, protective in transit insurance, freight, and
installation may be included in, or excluded from, capital expenditure cost in
accordance with the governmental unit's regular accounting practices.
(2) "Equipment" means an article of non-expendable, tangible personal property having
a useful life of more than one year and an acquisition cost which equals the lesser of
(a) the capitalization level established by the governmental unit for financial
statement purposes, or (b) $5000. This includes hardware and software.
(3) "Other capital assets" mean buildings, land, and improvements to buildings or land
that materially increase their value or useful life.
b. Capital expenditures which are not charged directly to a Federal award may be recovered
through use allowances or depreciation on buildings, capital improvements, and equipment
(see section 15.) See also section 38 for allowability of rental costs for buildings and
equipment.
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c. Capital expenditures for equipment, including replacement equipment, other capital assets,
and improvements which materially increase the value of useful life of equipment or other
capital assets are allowable as a direct cost when approved by the awarding agency. Federal
awarding agencies are authorized at their option to waive or delegate this approval
requirement.
d. Items of equipment with an acquisition cost of $5000 or less are considered to be supplies
and are allowable as direct costs of Federal awards without specific awarding agency
approval. (Please refer to Section III-B for State requirements regarding County direct
charging instructions.)
e. The unamortized portion of any equipment written off as a result of a change in
capitalization levels may be recovered by (1) continuing to claim the otherwise allowable
use allowances or depreciation charges on the equipment or by (2) amortizing the amount to
be written off over a period of years negotiated with the cognizant agency.
f. When replacing equipment purchased in whole or in part with Federal funds, the
governmental unit may use the equipment to be replaced as a trade-in or sell the property
and use the proceeds to offset the cost of the replacement property.
20. Fines and penalties Fines, penalties, damages, and other settlements resulting from violations (or
alleged violations) of, or failure of the governmental unit to comply with, Federal, State, local, or
Native American tribal laws and regulations are unallowable except when incurred as a result of
compliance with specific provisions of the Federal award or written instructions by the awarding
agency authorizing in advance such payments.
21. Fund raising and investment management costs
a. Costs of organized fund raising, including financial campaigns, solicitation of gifts and
bequests, and similar expenses incurred to raise capital or obtain contributions are
unallowable, regardless of the purpose for which the funds will be used.
b. Costs of investment counsel and staff and similar expenses incurred to enhance income from
investments are unallowable. However, such costs associated with investments covering
pension, self-insurance, or other funds which include Federal participation allowed by this
Circular are allowable.
c. Fund raising and investment activities shall be allocated an appropriate share of indirect
costs under the conditions described in subsection C.3.b. of Attachment A.
22. Gains and losses on disposition of depreciable property and other capital assets and
substantial relocation of Federal programs.
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a. Disposition
(1) Gains and losses on the sale, retirement, or other disposition of depreciable property
shall be included in the year in which they occur as credits or charges to the asset
cost grouping(s) in which the property was included. The amount of the gain or loss
to be included as a credit or charge to the appropriate asset cost grouping(s) shall be
the difference between the amounts realized on the property and the undepreciated
basis of the property.
(2) Gains and losses on the disposition of depreciable property shall not be recognized
as a separate credit or charge under the following conditions:
(a) The gain or loss is processed through a depreciation account and is reflected
in the depreciation allowable under sections 15 and 19.
(b) The property is given in exchange as part of the purchase price of a similar
item and the gain or loss is taken into account in determining the
depreciation cost basis of the new item.
(c) A loss results from the failure to maintain permissible insurance, except as
otherwise provided in subsection 25.d.
(d) Compensation for the use of the property was provided through use
allowances in lieu of depreciation.
b. Substantial relocation of Federal awards from a facility where the Federal Government
participated in the financing to another facility prior to the expiration of the useful life of the
financed facility requires Federal agency approval. The extent of the relocation, the amount
of the Federal participation in the financing, and the depreciation charged to date may
require negotiation of space charges for Federal awards.
c. Gains or losses of any nature arising from the sale or exchange of property other than the
property covered in subsection a., e.g., land or included in the fair market value used in any
adjustment resulting from a relocation of Federal awards covered in subsection b. shall be
excluded in computing Federal award costs.
23. General government expenses
a. The general costs of government are unallowable (except as provided in section 41). These
include:
(1) Salaries and expenses of the Office of the Governor of a State or the chief executive
of a political subdivision or the chief executives of federally-recognized Native
American tribal governments
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(2) Salaries and other expenses of State legislatures, tribal councils, or similar local
governmental bodies, such as county supervisors, city councils, school boards, etc.
whether incurred for purposes of legislation or executive direction
(3) Cost of the judiciary branch of a government
(4) Cost of prosecutorial activities unless treated as a direct cost to a specific program
when authorized by program regulations (however, this does not preclude the
allowability of other legal activities of the Attorney General)
(5) Other general types of government services normally provided to the general public,
such as fire and police, unless provided for as a direct cost in program regulations
b. For federally-recognized Native American tribal governments and Councils of Governments
(COGs), the portion of salaries and expenses directly attributable to managing and operating
Federal programs by the chief executive and his staff is allowable.
24. Idle facilities and idle capacity
a. As used in this section the following terms have the meanings set forth below:
(1) "Facilities" means land and buildings or any portion thereof, equipment individually
or collectively, or any other tangible capital asset, wherever located, and whether
owned or leased by the governmental unit.
(2) "Idle facilities" means completely unused facilities that are excess to the
governmental unit's current needs.
(3) "Idle capacity" means the unused capacity of partially used facilities. It is the
difference between (a) that which a facility could achieve under 100 percent
operating time on a one-shift basis less operating interruptions resulting from time
lost for repairs, setups, unsatisfactory materials, and other normal delays and (b) the
extent to which the facility was actually used to meet demands during the
accounting period. A multi-shift basis should be used if-it can be shown that this
amount of usage would normally be expected for the type of facility involved.
(4) "Cost of idle facilities or idle capacity" means costs such as maintenance, repair,
housing, rent, and other related costs, e.g., insurance, interest, and depreciation or
use allowances.
b. The costs of idle facilities are unallowable except to the extent that
(1) They are necessary to meet fluctuations in workload
(2) Although not necessary to meet fluctuations in workload, they were necessary when
acquired and are now idle because of changes in program requirements, efforts to
achieve more economical operations, reorganization, termination, or other causes
which could not have been reasonably foreseen. Under the exception stated in this
subsection, costs of idle facilities are allowable for a reasonable period of time,
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ordinarily not to exceed one year, depending on the initiative taken to use, lease, or
dispose of such facilities.
c. The costs of idle capacity are normal costs of doing business and are a factor in the normal
fluctuations of usage or indirect cost rates from period to period. Such costs are allowable,
provided that the capacity is reasonably anticipated to be necessary or was originally
reasonable and is not subject to reduction or elimination by use on other Federal awards,
subletting, renting, or sale, in accordance with sound business, economic, or security
practices. Widespread idle capacity throughout an entire facility or among a group of assets
having substantially the same function may be considered idle facilities.
25. Insurance and indemnification
a. Costs of insurance required or approved and maintained, pursuant to the Federal award, are
allowable.
b. Costs of other insurance in connection with the general conduct of activities are allowable
subject to the following limitations:
(1) Types and extent and cost of coverage are in accordance with the governmental
unit's policy and sound business practice.
(2) Costs of insurance or of contributions to any reserve covering the risk of loss of, or
damage to, Federal Government property are unallowable except to the extent that
the awarding agency has specifically required or approved such costs
c. Actual losses which could have been covered by permissible insurance (through a self-
insurance program or otherwise) are unallowable, unless expressly provided for in the
Federal award or as described below. However, the Federal Government will participate in
actual losses of a self insurance fund that are in excess of reserves. Costs incurred because
of losses not covered under nominal deductible insurance coverage provided in keeping with
sound management practice, and minor losses not covered by insurance, such as spoilage,
breakage, and disappearance of small hand tools, which occur in the ordinary course of
operations, are allowable.
d. Contributions to a reserve for certain self-insurance programs including workers
compensation, unemployment compensation, and severance pay are allowable subject to the
following provisions:
(1) The type of coverage and the extent of coverage and the rates and premiums would
have been allowed had insurance (including reinsurance) been purchased to cover
the risks. However, provision for known or reasonably estimated self-insured
liabilities, which do not become payable for more than one year after the provision
is made, shall not exceed the discounted present value of the liability. The rate used
for discounting the liability must be determined by giving consideration to such
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factors as the governmental unit's settlement rate for those liabilities and its
investment rate of return
(2) Earnings or investment income on reserves must be credited to those reserves.
(3) Contributions to reserves must be based on sound actuarial principles using
historical experience and reasonable assumptions. Reserve levels must be analyzed
and updated at least biennially for each major risk being insured and take into
account any reinsurance, coinsurance, etc. Reserve levels related to employee related
coverages will normally be limited to the value of claims (a) submitted and
adjudicated but not paid, b) submitted but not adjudicated, and (c) incurred but not
submitted. Reserve levels in excess of the amounts based on the above must be
identified and justified in the cost allocation plan or indirect cost rate proposal.
(4) Accounting records, actuarial studies, and cost allocations (or billings) must
recognize any significant differences due to types of insured risk and losses
generated by the various insured activities or agencies of the governmental unit. If
individual departments or agencies of the governmental unit experience significantly
different levels of claims for a particular risk, those differences are to be recognized
by the use of separate allocations or other techniques resulting in an equitable
allocation.
(5) Whenever funds are transferred from a self-insurance reserve to other accounts (e.g.,
general fund), refunds shall be made to the Federal Government for its share of
funds transferred, including earned or imputed interest from the date of transfer.
e. Actual claims paid to or on behalf of employees or former employees for workers'
compensation, unemployment compensation, severance pay, and similar employee benefits
(e.g., subsection 11.f. for post retirement health benefits), are allowable in the year of
payment provided (1) the governmental unit follows a consistent costing policy and (2) they
are allocated as a general administrative expense to all activities of the governmental unit.
f. Insurance refunds shall be credited against insurance costs in the year the refund is received.
g. Indemnification includes securing the governmental unit against liabilities to third persons
and other losses not compensated by insurance or otherwise. The Federal Government is
obligated to indemnify the governmental unit only to the extent expressly provided for in the
Federal award, except as provided in subsection d.
h. Costs of commercial insurance that protects against the costs of the contractor for correction
of the contractor's own defects in materials or workmanship are unallowable.
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26. Interest
a. Costs incurred for interest on borrowed capital or the use of a governmental unit's own funds
however represented are unallowable except as specifically provided in subsection b. or
authorized by Federal legislation.
b. Financing costs (including interest) paid or incurred on or after the effective date of this
Circular associated with the otherwise allowable costs of building acquisition, construction,
or fabrication, reconstruction or remodeling completed on or after October 1, 1980 is
allowable, subject to the conditions in (1)-(4). Financing costs (including interest) paid or
incurred on or after the effective date of this Circular associated with otherwise allowable
costs of equipment is allowable, subject to the conditions in (1)-(4).
(1) The financing is provided (from other than tax or user fee sources) by a bona fide
third party external to the governmental unit
(2) The assets are used in support of Federal awards
(3) Earnings on debt service reserve funds or interest earned on borrowed funds pending
payment of the construction or acquisition costs are used to offset the current
period's cost or the capitalized interest, as appropriate. Earnings subject to being
reported to the Federal Internal Revenue Service under arbitrage requirements are
excludable
(4) Governmental units will negotiate the amount of allowable interest whenever cash
payments (interest, depreciation, use allowances, and contributions) exceed the
governmental unit's cash payments and other contributions attributable to that
portion of real property used for Federal awards.
27. Lobbying The cost of certain influencing activities associated with obtaining grants, contracts,
cooperative agreements, or loans is an unallowable cost. Lobbying with respect to certain grants,
contracts, cooperative agreements, and loans shall be governed by the common rule, "New
Restrictions on Lobbying" published at 55 FR 6736 (February 26, 1990), including definitions, and
the Office of Management and Budget "Government-wide Guidance for New Restrictions on
Lobbying" and notices published at 54 FR 52306 (December 20, 1989), 55 FR 24540 (June 15
1990), and 57 FR 1772 (January 15, 1992), respectively.
28. Maintenance, operations and repairs Unless prohibited by law, the cost of utilities, insurance,
security, janitorial services, elevator service, upkeep of grounds, necessary maintenance, normal
repairs and alterations, and the like are allowable to the extent that they: (1) keep property
(including Federal property, unless otherwise provided for) in an efficient operating condition, (2)
do not add to the permanent value of property or appreciably prolong its intended life, and (3) are
not otherwise included in rental or other charges for space. Costs which add to the permanent value
of property or appreciably prolong its intended life shall be treated as capital expenditures (see
sections 15 and 19).
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29. Materials and supplies The cost of materials and supplies is allowable. Purchases should be
charged at their actual prices after deducting all cash discounts, trade discounts, rebates, and
allowances received. Withdrawals from general stores or stockrooms should be charged at cost
under any recognized method of pricing, consistently applied. Incoming transportation charges are a
proper part of materials and supply costs.
30. Memberships, subscriptions and professional activities
a. Costs of the governmental unit's memberships in business, technical, and professional
organizations are allowable.
b. Costs of the governmental unit's subscriptions to business, professional, and technical
periodicals are allowable.
c. Costs of meetings and conferences where the primary purpose is the dissemination of
technical information, including meals, transportation, rental of meeting facilities, and other
incidental costs are allowable.
d. Costs of membership in civic and community, social organizations are allowable as a direct
cost with the approval of the Federal awarding agency.
e. Costs of membership in organizations substantially engaged in lobbying are unallowable.
31. Motor pools The costs of a service organization which provides automobiles to user governmental
units at a mileage or fixed rate and/or provides vehicle maintenance, inspection, and repair services
are allowable.
32. Pre-award costs Pre-award costs are those incurred prior to the effective date of the award directly
pursuant to the negotiation and in anticipation of the award where such costs are necessary to
comply with the proposed delivery schedule or period of performance. Such costs are allowable
only to the extent that they would have been allowable if incurred after the date of the award and
only with the written approval of the awarding agency.
33. Professional service costs
a. Cost of professional and consultant services rendered by persons or organizations that are
members of a particular profession or possess a special skill, whether or not officers or
employees of the governmental unit, are allowable, subject to section 14 when reasonable in
relation to the services rendered and when not contingent upon recovery of the costs from-
the Federal Government.
b. Retainer fees supported by evidence of bona fide services available or rendered are
allowable.
34. Proposal costs Costs of preparing proposals for potential Federal awards are allowable. Proposal
costs should normally be treated as indirect costs and should be allocated to all activities of the
governmental unit utilizing the cost allocation plan and indirect cost rate proposal. However,
proposal costs may be charged directly to Federal awards with the prior approval of the Federal
awarding agency.
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Publication and printing costs Publication costs, including the costs of printing (including the processes of
composition, plate-making, press work, and binding, and the end products produced by such
processes), distribution, promotion, mailing, and general handling are allowable.
Rearrangements and alterations Costs incurred for ordinary and normal rearrangement and alteration of
facilities are allowable. Special arrangements and alterations costs incurred specifically for a
Federal award are allowable with the prior approval of the Federal awarding agency.
Reconversion costs Costs incurred in the restoration or rehabilitation of the governmental unit's facilities to
approximately the same condition existing immediately prior to commencement of Federal awards,
less costs related to normal wear and tear, are allowable.
Rental costs
a. Subject to the limitations described in subsections b. through d. of this section, rental costs
are allowable to the extent that the rates are reasonable in light of such factors as: rental
costs of comparable property, if any; market conditions in the area; alternatives available;
and, the type, life expectancy, condition, and value of the property leased.
b. Rental costs under sale and leaseback arrangements are allowable only up to the amount that
would be allowed had the governmental unit continued to own the - property.
c. Rental costs under less-than-arms-length leases are allowable only up to the amount that
would be allowed had title to the property vested in the governmental unit. For this purpose,
less-than-arms-length leases include, but are not limited to, those where:
(1) One party to the lease is able to control or substantially influence the actions of the
other
(2) Both parties are parts of the same governmental unit
(3) The governmental unit creates an authority or similar entity to acquire and lease the
facilities to the governmental unit and other parties.
d. Rental costs under leases which are required to be treated as capital leases under GAAP are
allowable only up to the amount that would be allowed had the governmental unit purchased
the property on the date the lease agreement was executed. This amount would include
expenses such as depreciation or use allowance, maintenance, and insurance. The provisions
of Financial Accounting Standards Board Statement 13 shall be used to determine whether a
lease is a capital lease. Interest costs related to capital leases are allowable to the extent they
meet the criteria in section 26.
39. Taxes
a. Taxes that a governmental unit is legally required to pay are allowable, except for self-
assessed taxes that disproportionately affect Federal programs or changes in tax policies that
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disproportionately affect Federal programs. This provision becomes effective for taxes paid
during the governmental unit's first fiscal year that begins on or after January 1, 1998, and
applies thereafter.
b. Gasoline taxes, motor vehicle fees, and other taxes that are in effect user fees for benefits
provided to the Federal Government are allowable.
c. This provision does not restrict the authority of Federal agencies to identify taxes where
Federal participation is inappropriate. Where the identification of the amount of unallowable
taxes would require an inordinate amount of effort, the cognizant agency may accept a
reasonable approximation there of.
40. Training The cost of training provided for employee development is allowable.
41. Travel costs
a. General- Travel costs are allowable for expenses for transportation, lodging, subsistence,
and related items incurred by employees traveling on official business. Such costs may be
charged on an actual cost basis, on a per diem or mileage basis in lieu of actual costs
incurred, or on a combination of the two, provided the method used is applied to an entire
trip, and results in charges consistent with those normally allowed in like circumstances in
non-federally-sponsored activities. Notwithstanding the provisions of section 23, travel costs
of officials covered by that section, when specifically related to Federal awards, are
allowable with the prior approval of a grantor agency.
b. Lodging and subsistence- Costs incurred by employees and officers for travel, including
costs of lodging, other subsistence, and incidental expenses, shall be considered reasonable
and allowable only to the extent such costs do not exceed charges normally allowed by the
governmental unit in its regular operations as a result of the governmental unit's policy. In
the absence of a written governmental unit policy regarding travel costs, the rates and
amounts established under subchapter I of Chapter 57 of Title 5, United States Code "Travel
and Subsistence Expenses; Mileage Allowances", or by the Administrator of General
Services, or the President (or his designee) pursuant to any provisions of such subchapter
shall be used as guidance for travel under Federal awards (41 U.S.C. 420, "Travel Expenses
of Government Contractors").
c. Commercial air travel- Airfare costs in excess of the customary standard (coach or
equivalent) airfare are unallowable except when such accommodations would: require
circuitous routing, require travel during unreasonable hours, excessively prolong travel,
greatly increase the duration of the flight, result in increased cost that would offset
transportation savings, or offer accommodations not reasonably adequate for the medical
needs of the traveler. Where a governmental unit can reasonably demonstrate to the
awarding agency either the nonavailability of customary standard airfare or Federal
Government contract airfare for individual trips or, on an overall basis, that it is the
governmental unit's practice to make routine use of such airfare, specific determinations of
nonavailability will generally not be questioned by the Federal Government, unless a pattern
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of avoidance is detected. However, in order for airfare costs in excess of the customary
standard commercial airfare to be allowable, e.g., use of first-class airfare, the governmental
unit must justify and document on a case-by-case basis the applicable condition(s) set forth
above.
d. Air travel by other than commercial carrier- Cost of travel by governmental unit owned,
leased, or chartered aircraft, as used in this section, includes the cost of lease, charter,
operation (including personnel costs), maintenance, depreciation, interest, insurance, and
other related costs. Costs of travel via governmental unit-owned, leased, or chartered aircraft
are unallowable to the extent they exceed the cost of allowable commercial air travel, as
provided for in Subsection C.
42. Under recovery of costs under Federal agreements- Any excess costs over the Federal
contribution under one award agreement are unallowable under other award agreements.
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Circular No. A-87
Attachment C
STATE/LOCAL-WIDE CENTRAL SERVICE COST ALLOCATION PLANS
TABLE OF CONTENTS
A. General
B. Definitions
1. Billed central services
2. Allocated central services
3. Agency or operating agency
C. Scope of the Central Service Cost Allocation Plans
D. Submission Requirements
E. Documentation Requirements for Submitted Plans
1. General
2. Allocated central services
3. Billed services
a. General
b. Internal service funds
c. Self-insurance funds
d. Fringe benefits
4. Required certification
F. Negotiation and Approval of Central Service Plans
G. Other Policies
1. Billed central service activities
2. Working capital reserves
3. Carry-forward adjustments of allocated central service costs
4. Adjustments of billed central services
5. Records retention
6. Appeals
7. OMB assistance
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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 benefited
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 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 Superintendent of
Documents, U.S. Government Printing Office.
B. Definitions
1. "Billed central services" means central services that are billed to benefited agencies and/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.
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
benefited agencies on some reasonable basis. Examples of such services might include
general accounting, personnel administration, purchasing, etc.
3. "Agency or operating agency" means an organizational unit or sub-division within a
governmental unit that is responsible for the performance or administration of awards or
activities of the governmental unit.
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
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the most recently completed year or the year immediately preceding the most recently
completed year.
2. Each local government that has been designated as a "major local government" by the Office
of Management and Budget (OMB) is also required to submit a plan to its Cognizant agency
annually. OMB periodically lists major local governments in the Federal Register.
3. All other local governments claiming central service costs must develop a plan in
accordance with the requirements described in this Circular 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 80 by the
Cognizant agency. Where a local government only receives funds as a sub-recipient, the
primary recipient will be responsible for negotiating indirect cost rates and/or monitoring
the sub-recipient'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 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 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 benefiting 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 Circular, 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 benefited
agencies, and a summary schedule showing the allocation of each service to the specific
benefited 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. shall also be included.
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3. Billed services-
a. General- The information described below shall 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 shall 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
Circular, with an explanation of how variances will be handled.
(2) Revenues shall 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 shall be provided. Expenses
shall be broken out by object cost categories (e.g., salaries, supplies, etc.).
c. Self-insurance funds- For each self-insurance fund, the plan shall 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
benefited 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 shall 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 benefited activities. In addition, for pension and post-
retirement health insurance plans, the following information shall 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
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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 OMB Circular A-I 7, "Cost Principles for State and Local
Governments, " 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
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. All proposed central service cost allocation plans that are required to be submitted will be
reviewed, negotiated, and approved by the Federal cognizant agency on a timely basis. The
cognizant agency 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 funding agency has reason to believe that special
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operating factors affecting its awards necessitate special consideration, the funding agency
will, prior to the time the plans are negotiated, notify the cognizant agency.
2. The results of each negotiation shall be formalized in a written agreement between the
Cognizant agency 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 shall be made available to all Federal agencies for their use.
3. 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 Attachment B of
this Circular, or (iii) by the terms and conditions of Federal awards, or (b) are unallowable
because they are clearly not allocable to Federal awards, shall be adjusted, or a refund shall
be made at the option of the Federal cognizant agency. 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 days cash expenses for normal
operating purposes is considered reasonable. A working capital reserve exceeding 60 days
may be approved by the Cognizant Federal agency 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 shall be
based on the estimated costs of providing the services, including an estimate of the allocable
central service costs.
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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 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.
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 the Common Rule.
6. Appeals- If a dispute arises in the negotiation of a plan between the Cognizant agency and
the governmental unit, the dispute shall be resolved in accordance with the appeals
procedures of the Cognizant agency.
7. OMB assistance- To the extent that problems are encountered among the Federal agencies
and/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.
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Circular No. A-87
Attachment D
PUBLIC ASSISTANCE COST ALLOCATION PLANS
TABLE OF CONTENTS
A. General
B. Definitions
1.State public assistance agency
2.State public assistance agency costs
C. Policy
D. Submission, Documentation, and Approval of Public Assistance Cost Allocation
Plans
E. Review of Implementation of Approved Plans
F. Unallowable Costs
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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 Attachment extends these
requirements to all Federal agencies whose programs are administered by a State public assistance
agency. Major federally-financed programs typically administered by State public assistance
agencies include: Aid to Families with Dependent Children, 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 Attachment, 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 vendor
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 Attachment (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 subsection E, 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 quarter
following the submission of the plan or amendment, unless another date is specifically
approved by HHS. HHS, as the Cognizant agency 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.
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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 funding agencies, single audits, or audits conducted by
the Cognizant audit agency.
2. Where inappropriate charges affecting more than one funding 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
funding agencies, the dispute shall be resolved in accordance with the appeals procedures
set out in 45 CFR Part 75. Disputes involving only one funding agency will be resolved in
accordance with the funding agency's appeal process.
4. To the extent that problems are encountered among the Federal agencies and/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 Cost
Claims developed under approved cost allocation plans will be based on allowable costs as
identified in this Circular. 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
awards.
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Circular No. A-87
Attachment E
STATE AND LOCAL INDIRECT COST RATE PROPOSALS
TABLE OF CONTENTS
A. General
B. Definitions
1. Indirect cost rate proposal
2. Indirect cost rate
3. Indirect cost pool
4. Base
5. Predetermined rate
6. Fixed rate
7. Provisional rate
8. Final rate
9. Base period
C. Allocation of Indirect Costs and Determination of Indirect Cost Rates
1. General
2. Simplified method
3. Multiple allocation base method
4. Special indirect cost rates
D. Submission and Documentation of Proposals
1. Submission of indirect cost rate proposals
2. Documentation of proposals
3. Required certification
E. Negotiation and Approval of Rates
F. Policies
1. Fringe benefit rates
2. Billed services provided by the grantee agency
3. Indirect cost allocations not using rates
4. Appeals
5. Collections of unallowable costs and erroneous payments
6. OMB assistance
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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 benefited 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
Attachment C) 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 State 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 Superintendent of Documents, U.S. Government Printing Office.
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 grantee department or agency, accounting and
personnel services performed within the grantee department or agency, depreciation or use
allowances on buildings and equipment, the costs of operating and maintaining facilities,
etc.
5. This Attachment does not apply to State public assistance agencies. These agencies should
refer instead to Attachment D.
B. Definitions
1. "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.
2. "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.
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3. "Indirect cost pool" is the accumulated costs that jointly benefit two or more programs or
other cost objectives.
4. "Base" means the accumulated direct costs (normally either total direct salaries and wages
or total direct costs exclusive of any extraordinary or distorting expenditure) used to
distribute indirect costs to individual Federal awards. The direct cost base selected should
result in each award bearing a fair share of the indirect costs in reasonable relation to the
benefits received from the costs.
5. "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. 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.
6. "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.
7. "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.
8. "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.
9. "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,
shall be so selected as to avoid inequities in the allocation of costs.
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
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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 benefited 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 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 grantee agency'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 grantee agency'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 shall 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, major subcontracts, etc.), (2)
direct salaries and wages, or (3) another base which results in an equitable
distribution.
3. Multiple allocation base method.
a. Where a grantee agency's indirect costs benefit its major functions in varying
degrees, such costs shall be accumulated into separate cost groupings. Each
grouping shall then be allocated individually to benefited functions by means of a
base which best measures the relative benefits.
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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 benefited functions. When an allocation
can be made by assignment of a cost grouping directly to the function benefited, the
allocation shall 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 benefited functions during the base period.
d. Except where a special indirect cost rate(s) is required in accordance with subsection
4, the separate groupings of indirect costs allocated to each major function shall be
aggregated and treated as a common pool for that function. The costs in the common
pool shall 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, major subcontracts, 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 grantee department
or agency 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 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 award. The separate indirect cost pool should be developed during the course
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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 subsections 2. & 3. (2) The award to
which the rate would apply is material in amount.
b. Although this Circular adopts the concept of the full allocation of indirect costs,
there are some Federal statutes which restrict the reimbursement of certain indirect
costs. Where such restrictions exist, it may be necessary to develop a special rate for
the affected award. Where a "restricted rate" is required, the 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 the Common Rule.
b. A governmental unit for which a Cognizant agency assignment has been specifically
designated must submit its indirect cost rate proposal to its cognizant agency. The
Office of Management and Budget (OMB) will periodically publish lists of
governmental units identifying the appropriate Federal cognizant agencies. The
Cognizant agency for all governmental units or agencies not identified by OMB will
be determined based on the Federal agency providing the largest amount of Federal
funds. In these cases, a governmental unit must develop an indirect cost proposal in
accordance with the requirements of this Circular and maintain the proposal and
related supporting documentation for audit. These governmental units are not
required to submit their proposals unless they are specifically requested to do so by
the Cognizant agency. Where a local government only receives funds as a sub-
recipient, the primary recipient will be responsible for negotiating and/or monitoring
the sub-recipient's plan.
c. Each Native American tribal government desiring reimbursement of indirect costs
must submit its indirect cost proposal to the Department of the Interior (its cognizant
Federal agency).
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 Federal agency. 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
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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 shall 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 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 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 shall 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 al 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 OMB Circular A-
87, "Cost Principles for State and Local Governments.” 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
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
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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 Federal
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 funding agency
has reason to believe that special operating factors affecting its awards necessitate special
indirect cost rates, the funding agency will, prior to the time the rates are negotiated, notify
the cognizant Federal agency.
2. The use of predetermined rates, if allowed, is encouraged where the Cognizant agency has
reasonable assurance based on past experience and reliable projection of the grantee
agency'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 shall be formalized in a written agreement between the
Cognizant agency 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 shall be made available to all Federal agencies for their use.
4. Refunds shall 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 Attachment B of this
Circular, 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 grantee agencies during the indirect cost negotiation
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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 grantee agency level (i.e., the
agency specifically identifies fringe benefit costs to individual employees), the
governmental unit should so advise the cognizant agency.
2. Billed services provided by the grantee agency In some cases, governmental units Provide
and bill for services similar to those covered by central service cost allocation plans (e.g.,
computer centers). Where this occurs, the governmental unit should be guided by the
requirements in Attachment C relating to the development of billing rates and
documentation requirements and should advise the Cognizant agency 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, a governmental unit, because
of the nature of its 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 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 and the governmental unit, the dispute shall be resolved in accordance
with the appeals procedures of the Cognizant agency.
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 agency regulations).
6. OMB assistance To the extent that problems are encountered among the Federal agencies
and/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.
