APPENDIX 6 BUREAU OF THE BUDGET-CIRCULAR NO. A-21 EXECUTIVE OFFICE OF THE PRESIDENT, BUREAU OF THE BUDGET, CIRCULAR No. A-21 To the Heads of Executive Departments and Establishments. Subject: Principles for determining costs applicable to research and development under grants and contracts with educational institutions. 1. Purpose. This Circular provides the basis for a uniform approach to determining the costs applicable to research and development performed by educational institutions under grants from and contracts with the Federal Government. The principles and related policy guides provided herein are designed for Government-wide use. All Federal agencies that sponsor research and development work at educational institutions are requested to apply these principles and related policy guides to the fullest extent practicable in determining the amounts to be authorized under grants or contracts for such work and in developing budget estimates therefor. 2. Policy guides. The following general policy guides are provided for the information of the Federal agencies concerned: a. Each college and university has its own unique combination of staff, facilities, and experience, and should be encouraged to conduct research in a manner consonant with its academic programs and institutional objectives while fulfilling its contractual responsibilities. b. The successful application of these principles requires development of mutual understanding between representatives of universities and of the Federal Government as to their scope, applicability, and interpretation. c. The extent of agency and institution participation in the financing of a particular research or development project is properly the subject of negotiation between the particular agency and the educational institution concerned. d. It is not intended that the application of these principles should require any significant changes in the generally accepted and established accounting practices of colleges and universities. 3. Cost principles. The principles and standards to be followed in costing Government-sponsored research and development projects conducted by educational institutions are set forth in the attachments, as follows: a. Attachment A-PRINCIPLES FOR DETERMINING APPLICABLE COSTS UNDER RESEARCH AGREEMENTS. This document states the general principles to be applied in costing research and in associating indirect costs with particular research agreements. Agencies are requested to promulgate this document without change, where practicable, in order to assure uniformity of approach throughout the Government. b. Attachment B-GENERAL STANDARDS FOR SELECTED ITEMS OF COST. This document sets forth standards with respect to the allowability of the particular items of cost listed therein. The need for a continuing review of these standards is recognized; individual agencies may find it necessary to request amendments to these standards from time to time. 4. Objectives. The objective of this Circular and its attachments is to provide to educational institutions recognition of their full allocated costs of research under generally accepted cost accounting principles. Alternative methods are specified as permissible in unusual circumstances or to prevent inequities. provision for profit or other increment above cost is intended. No 5. Revisions. The revisions introduced in the principles as of this date are limited to the following sections of Attachments A and B : Attachment A, page 5, section I-E-4. Attachments. MAURICE H. STANS, Director. [Attachment A-Circular No. A-21] PRINCIPLES FOR DETERMINING APPLICABLE COSTS UNDER RESEARCH AGREEMENTS A. Purpose and scope I. GENERAL 1. This attachment sets forth the general principles which Federal agencies are requested to follow in determining the allowable costs of research and development performed by educational institutions under grants, cost-reimbursement type contracts, and cost-reimbursement type subcontracts. To the extent costs are applicable, these principles may also be used as a guide for the pricing of fixed price contracts and subcontracts. 2. It is the intent of these principles to provide Government agencies and educational institutions with a common basis for determining the allowable costs of research sponsored by the Federal Government. Application of these principles should enable agencies and institutions to identify the allowable direct costs of such research, plus the allocable portion of the allowable indirect costs, less applicable credits. The tests of allowability of costs applied in these principles are reasonableness and allocability under consistently applied generally accepted cost accounting principles and practices; however, these provisions are subject to any limitations as to types or amounts of costs set forth in the research agreement. 3. These principles do not attempt to identify the circumstances or dictate the extent of agency and institution participation in the financing of a particular research and development project, but rather are confined to the subject of cost determination. Arrangements concerning financial participation are properly the subject of negotiation between the particular agency and the educational institution concerned. 4. These principles should be applied to all Government-sponsored research at an educational institution, including research conducted at locations other than the main campus of the institution. 5. A negotiated fixed amount in lieu of indirect costs may be appropriate in certain instances for off-campus or segregated research projects where (a) research agreements are charged directly for the cost of many of their administrative or housekeeping services, or (b) the cost of benefits derived from an institution's indirect services cannot be readily determined by use of apportionment or allocation bases normally employed, or (c) the costs of apportioning and allocating expenses to research agreements are excessive. The negotiated amount should not exceed a conservative estimate of anticipated indirect costs. B. Definition of terms 1. For the purposes of this document, the following terms are defined: a. Research agreements are agreements to perform federally sponsored research through grants, cost-reimbursement type contracts, cost-reimbursement type subcontracts, and fixed price contracts and subcontracts for research. b. Apportionment is the process by which the indirect costs of the institution are assigned to (1) instruction and research, and (2) other institutional activities. c. Allocation is the process by which the indirect costs apportioned to instruction and research are distributed to research agreements. d. Sponsoring agency means the Federal agency for which the institution is performing research. Its use in this document does not imply a change in concept or intent for those agencies that have traditionally used a grant rather than a contractual instrument. e. Original complement means the complement of equipment initially placed in buildings to perform the functions currently being performed in such buildings. If a permanent change in the function of a building takes place, a redetermination of the original complement of equipment may be made at that time to establish a new original complement. f. Other institutional activities means all organized activities of an institution not directly related to the instruction and research functions, such as residence halls, dining halls, student hospitals, student unions, intercollegiate athletics, book stores, faculty housing, student apartments, guest houses, chapels, theaters, public museums, financial campaigns, and other similar activities or auxiliary enterprises. Also included under this definition is any category of cost treated as "unallowable," provided such category of cost identifies a function or activity to which a portion of the institution's general overhead expenses are properly allocable. C. Direct costs 1. Direct costs are those identified as having been specifically incurred to perform a particular research agreement. The general types of direct costs are: a. Direct salaries and wages, including employee benefit expenses and pension plan costs (see attachment B) to the extent that they are consistently treated by the educational institution as a direct rather than an indirect cost, are those applicable directly to the performance of a research agreement. Such salaries and wages should be charged at the actual rates paid by the institution. Where professional staff paid on a salary basis work directly part time on a research agreement, current and reasonable estimates of time spent may be used in the absence of actual time records. b. Direct material costs include raw materials, purchased or supplied from stock, which are directly consumed or expended in the performance of a research agreement, or are otherwise applicable directly to a research agreement. 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 equip ment 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 eight 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 two percent (2 percent) of acquisition costs. The use allowance for equipment shall be computed at an annual rate not exceeding six and two-thirds percent (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 ten percent (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 six and two-thirds percent (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 1-B-1-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. |