(c) Other direct costs include other expenses related directly to a particular research agreement or project, including abnormal utility consumption. This may include services purchased from institution service operations, provided such are consistently treated as direct rather than indirect costs and are priced. under a recognized method of costing or pricing designed to recover only actual costs and conforming to generally accepted cost-accounting practices consistently followed by the institution. Purchases of equipment will be included under this heading only to the extent expressly provided for in the research agreement or approved pursuant to such agreement.

D. Indirect costs

1. Indirect costs are those which, because of their incurrence for common or joint objectives, are not readily subject to treatment as direct costs of research agreements or other activities. The general types of indirect costs are:

(a) General administration and general expenses are those incurred for the general executive and administrative offices of educational institutions and other expenses of a general character which do not relate solely to any specific division of the institution. Employee benefit expenses and pension plan costs may be included in this category to the extent that they are consistently treated by the educational institution as an indirect rather than a direct cost.

(b) Research administration expenses are those which apply to research administered in whole or in part by a separate organization or an identifiable administrative unit. Examples of work relating to research which is sometimes performed under such organizational arrangement are contract administration, security, purchasing, personnel administration, and editing and publishing of research data.

(c) Operation and maintenance expenses are those incurred for operating and maintaining the institution's physical plant. They include expenses normally incurred by the institution for administration or supervision of the physical plant; janitorial service; repairs and ordinary or normal alterations of buildings, furniture, and equipment; care and maintenance of grounds; utilities; and other expenses customarily associated with the operation, maintenance, preservation and protection of the physical plant.

(d) Library expenses are those incurred for direct operation of the library plus a use allowance for library books. The use allowance shall not exceed 8 cents per volume per year.

(e) Use allowance is a means of compensation for the use of buildings, capital improvements, and equipment over and above the expenses for operation and maintenance when depreciation or other equivalent costs are not considered. The use allowance for buildings and improvements shall be computed at an annual rate not to exceed 2 percent of acquisition cost. The use allowance for equipment shall be computed at an annual rate not exceeding 6% percent of acquisition cost of usable equipment in those cases where the institution maintains current records with respect to such equipment on hand. Where the institution's records reflect only the cost (actual or estimated) of the original complement of equipment, the use allowance shall be computed at an annual rate not exceeding 10 percent of such cost. In those cases where no equipment records are maintained, the institution will justify a reasonable estimate of the acquisition cost of usable equipment which may be used to compute the use allowance at an annual rate not exceeding 6% percent of such estimate. Computation of the use allowance shall exclude the portion of the cost of buildings and equipment paid for out of Federal funds and the cost of grounds.

(f) Indirect departmental expenses are those incurred for departmental administration, such as salaries of deans or heads of colleges, schools, departments or divisions, and related secretarial and other administrative expenses. E. Applicable costs

1. The cost of a research agreement is comprised of the allowable direct costs incident to its performance, plus the allocable portion of the allowable indirect costs of the institution, less applicable credits.

2. When any types of expense ordinarily treated as indirect costs are charged to a research agreement as direct costs, the costs of similar items applicable to other activities of the institution must be eliminated from indirect costs allocable to the research agreement.

3. Where a particular understanding has been reached regarding specific items of cost to be reimbursed, the research agreement should clearly state such understanding.

4. Attachment B provides standards to be applied in determining the allowability of certain items of cost. Attachment B also identifies certain types of expenditures which relate solely to instruction; such costs of instruction, including applicable overhead, do not enter into the costs of research agreements either as direct costs or indirect costs.

A. General

II. DETERMINATION

OF INDIRECT COSTS

1. In determining the indirect costs applicable to federally sponsored research agreements, the allowable indirect costs should first be apportioned equitably between (a) instruction and research activity, and (b) other institutional activities, as provided in paragraph II-B below.

2. The amounts of indirect costs apportioned to instruction and research should then be allocated in an equitable manner to research agreements, as provided in paragraph II-C below.

3. Actual conditions must be taken into account in determining the most suitable method or methods to be used in the apportionment and allocation of indirect costs. The objective should be the selection of a method or methods which will distribute the indirect costs in a fair and equitable manner to the Government research and development work and other work of the institution, giving due consideration to the nature and extent of the use of the institution's facilities by research personnel, academic staff, students, and other personnel or activities, and to the materiality of the amounts involved. The methods used should conform with generally accepted cost accounting practices, provide uniformity of treatment for like cost elements, be applied consistently, and produce equitable results. Any significant change, such as in the nature or extent of Government work or other activities sponsored or conducted by the institution, may require reconsideration of the methods previously in use to determine whether they continue to be equitable.

B. Apportionment

1. Indirect costs shall be apportioned as between (a) instruction and research activities, and (b) other institutional activities as defined in paragraph I-B-l-f above. The apportionment shall be made as follows:

(a) General administration and general expenses, on the basis of total expenditures (exclusive of capital expenditures and use allowances), direct salaries and wages, or other bases appropriate in the circumstances.

(b) Operation and maintenance of the physical plant, if not separately costed, on the basis of total square or cubic footage of the buildings.

(c) Other types of indirect costs normally do not require apportionment. Where they do, an equitable basis for making the apportionment should be selected.

C. Allocation

1. After determination of the total amount of indirect costs applicable to instruction and research activities, such indirect costs shall in turn be allocated between instruction activities and research agreements as described below.

2. The following criteria should be used with such appropriate modifications as will under the circumstances produce reasonably equitable allocation of the indirect costs associated with research agreements:

(a) General administration and general expenses should normally be allocated on the basis of total expenditures (exclusive of capital expenditures and use allowances) if equitable, direct salaries and wages, or other bases appropriate in the circumstances.

(b) Research administration expenses should be allocated to (1) applicable research agreements, and (2) other research benefiting therefrom on the basis of records reflecting the proportion fairly applicable to each or, in the absence of such records, on the basis of a reasonable estimate.

(c) Operation and maintenance expenses should be allocated on a basis that gives primary emphasis to space utilization. The amount allocated may be developed as follows:

(1) Where actual space and related cost records are or can readily be maintained without significant change in the accounting practices, the amount allocated to research agreements should be based on such data.

(2) Where the space and related cost records maintained are not sufficient for purposes of (1) above, a reasonable estimate of the proportion of total space

assigned to research agreements normally will suffice, and this proportion of operation and maintenance expense should be allocated to research agreements. Where it can be established that the cost of maintaining space assigned to research varies significantly from the cost of maintaining other space, appropriate weighting factors may be used to give effect to such variations.

(3) Where more definitive information is not available, either of the following simplified techniques for determining space may be used, as most appropriate: (a) Reduce the total space identified with instruction and research by the amount of space occupied by undergraduate students, including appropriate portions of classrooms and access and related space. Reduce by the same proportion the amount of maintenance and operation expense that has been apportioned to instruction and research, and then allocate to research agreements on the basis of the relationship that direct salaries and wages of research agreements bears to direct salaries and wages of instruction and research; or

(b) Prepare a reasonable estimate of the average gross space assigned per research worker, and extend to the equivalent annual number of research workers under research agreements. The resulting product should then be related to total space assigned to instruction and research in order to obtain the proportion of space utilized for research agreements. The resulting proportion should then be applied to operation and maintenance expense to obtain the amount allocable to research agreements.

(4) Where it can be demonstrated that an area or volume of space basis of allocation is impractical or inequitable, other bases may be used provided consideration is given to the use of facilities by research personnel and others, including students.

(d) Library expenses should normally be allocated to research agreements on the basis of population including students and other users. Where appropriate, consideration may be given to weighting segments of the population figures as necessary to produce equitable results.

(e) Use allowance for buildings and equipment should, if depreciation or other equivalent costs are not considered, be computed in accordance with paragraph I-D-e. The cost of buildings and equipment used by "other institutional activities" (as defined) should be excluded from any computation of use allowances. If available records permit, use allowances may be specifically allocated in whole or in part to research agreements. In the absence of such usable records, use allowance may be allocated to research agreements on the same basis as that used for allocating operation and maintenance expenses.

(f) Indirect departmental expenses, as defined in paragraph I-D-l-f, which jointly benefit both research agreements and other activities should be allocated between research agreements administered or supervised by the department and other work of the department on any equitable basis, possibly direct salaries and wages, total direct expenditures, or approximate time so devoted. Where equitable results would be obtained, the distribution may be made on a composite base which would include all schools and departments.

3. Indirect costs allocated to research agreements normally should be treated as a common pool. The costs in such common pool should then be distributed to individual research agreements benefiting therefrom on a single rate basis. This rate will be the percentage which the indirect cost pool is of direct salaries and wages of the applicable research agreements. If appropriate, total direct expenditures may be used rather than salaries and wages.

4. It is recognized that in certain cases, due to the nature of the work, the facilities or personnel involved, or other considerations, the application of a single indirect expense rate on research agreements may produce inequitable results to the institution or to the Government. In such cases, it may be necessary to develop two or more indirect expense rates by means of appropriate adjustment to the basic indirect expense rate developed through use of the common pool, or by segregation of the indirect expenses allocated to research agreements into two or more indirect expense pools. In the latter case, the costs in each such pool will be distributed to the specific research agreements benefiting therefrom on the basis of direct wages and salaries or total direct expenditures, as appropriate. Examples of conditions which may justify the development of two or more pools of indirect expense are:

(a) Where the nature of a particular type of overhead cost requires a different basis of allocation to produce equitable results.

(b) Where a research agreement or group of agreements or the facility in which such agreement(s) is performed provides its own services to a significant degree, as may be in the case of a hospital or a segregated or off-campus facility.

(c) Where a research agreement requires significantly different degrees of indirect services from the institution. For example, such conditions may exist where: (1) significant amounts of Government-owned facilities or equipment are provided in lieu of that normally furnished by the institution, (2) a research agreement requires an unusual amount of power or other utilities, (3) the cost of a special library provided in lieu of regular library services is reimbursed by the Government, or (4) construction constitutes a significant portion of the work. (d) Where it is appropriate to associate certain costs more directly with the activities benefited, such as where the research work is performed on one campus of a multicampus university.

5. Where research is separately administered, in whole or in part, or separate services are provided in lieu of those services normally provided by the institution, the cost of the normal institutional administration or other services replaced thereby shall be excluded from allocation to such research.

D. Overhead determinations acceptable under special circumstances

1. Indirect costs may be claimed at a rate which is anticipated to be less than that which would otherwise be allowable with provision made in the research agreement for adjustment if actual costs subsequently prove to be less than the claimed rate.

2. Where the total direct cost of Government-sponsored research and development work at an institution does not exceed $250,000 in a year, the use of an abbreviated procedure may be acceptable in the determination of allowable indirect costs. Under this abbreviated procedure, data taken directly from the institution's most recent annual financial report and immediately available supporting information will be utilized as a basis for dividing total expenditures (exclusive of expenditures for capital items and unallowable costs, as defined in attachment B, and expenditures for student aid and for annuity payments) between (a) expenditures applicable to the indirect expense pool, and (b) all other expenditures. The indirect expense pool shall be limited to the following categories of expense: (1) General administration and general expenses, inclusive of allocable salaries and expenses of deans of schools and department heads. (Where the allocable portion of the salaries and expenses of deans of schools and department heads is not available, a maximum of 20 percent of the total of such salaries and expenses may be included in the indirect expense pool.)

(2) Operation and maintenance expenses.

(3) Library operating expenses.

All categories of expense not specifically cited above will be grouped under "all other expenditures," including the expenses of research, education (including the items cited in paragraphs B.l.a. and B.l.d. of attachment B), and other institutional activities (as defined in I.B.l.f. of attachment A). The indirect expense rate will then be computed as the percentage relationship of the indirect expense pool to all other expenditures (as defined above). If the information required for this abbreviated procedure cannot be obtained from an analysis of the most recent annual financial report and immediately available supporting information, the regular procedure shall be used for the determination of indirect costs.

[Attachment B] CIRCULAR No. A-21

GENERAL STANDARDS FOR SELECTED ITEMS OF COST

A. Purpose and applicability

1. This attachment provides standards to be applied in determining the allowability of certain items of cost. All Federal agencies that sponsor research and development work at educational institutions should adopt these standards and apply them to the extent deemed practicable in determining costs under grants and contracts for such work.

2. The standards adopted hereunder should apply irrespective of whether a particular item of cost is properly treated as direct cost or indirect cost. Failure to mention a particular item of cost in the standards should not imply that it is either allowable or unallowable; rather determination as to allowability in such case should be based on the treatment or standards provided for similar or related items of cost.

3. In case of discrepancy between the provisions of a specific research agreement and the applicable standards provided, the provisions of the research agreement should govern.

B. Costs applicable to instruction

1. Except as specifically noted, the following types of costs apply only to instruction, and therefore do not enter into the costs of research agreements, either as direct costs or indirect costs, unless specific provision is made therefor in the research agreement:

(a) Commencement and convocation costs.

(b) (See C-39 of this attachment.)

(c) Scholarships, fellowships, tuition, and other forms of student-aid costs. However, in certain cases, such costs may be allocable in part to research agreements under the conditions set forth in paragraph C-35 of this attachment.

(d) Student services costs, including such activities as deans of students, administration of student affairs, registrar, placement offices, student advisers, student health and infirmary services, and such other activities as are identifiable with student services. However, in the case of students actually engaged in work under research agreements, a proportion of student services costs measured by the relationship between hours of work by students on such research work and total student hours including all research time may be allowed as a part of research administration expenses.

C. Allowable and unallowable costs

1. Advertising costs include the cost of advertising media and related technical and administrative costs. Only the following advertising costs are allowable: (a) help-wanted advertising, (b) other advertising necessary for the performance of the research agreement to the extent authorized.

2. Bad debts, including losses (whether actual or estimated) arising from uncollectible accounts and other claims, related collection costs, and related legal costs are unallowable.

3. Capital expenditures are unallowable except as provided for in the research agreement. This includes costs of books, equipment and buildings, as well as repairs which materially increase the value or useful life of such equipment or buildings.

4. Civil defense costs are those incurred in planning for, and the protection of life and property against, the possible effects of enemy attack. Reasonable costs of civil defense measures (including costs in excess of normal plant-protection costs, first-aid training and supplies, firefighting training, posting of additional exit notices and directions, and other approved civil defense measures) undertaken on the institution's premises pursuant to suggestions or requirements of civil defense authorities are allowable when apportioned to all activities of the institution. Capital expenditures for civil defense purposes shall not be allowed, but a use allowance may be permitted in accordance with provisions set forth elsewhere. Costs of local civil defense projects, not on the institution's premises, are unallowable.

5. Communication costs including telephone services, local and long distance telephone calls, telegrams, radiograms, postage, and the like are allowable.

6. Compensation for personal services. Each institution shall maintain control over its salary and wage rates according to its established policy consistently applied, provided, however, that the excess of salary and wage rates paid to personnel working on Government research agreements over salary and wage rates paid to personnel working on the institution's departmental research or other research will not be allowed unless specifically provided in the agreement or approved by the contracting officer. This principle does not prohibit the charging of the full salary of any temporary employee in whose favor a salary differential exists solely by virtue of the nature of his employment in accordance with the regular practice of the institution concerned. Faculty members shall be considered as employed for the period represented by the sum of all semesters and other periods during which they are required to work under the practice of the institution concerned. (Example: Professor of X institution is required to work two semesters of 42 months each, or a total of 9 months out of the academic year. His compensation is $5,400. During the summer months, July, August, and September, he works full time on Government research projects in the institution laboratory. Unless the establish practice of the institution relating to summer compensation, not based on Government contract experience, would result in a different com