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Federal Register/Vol. 70, No. 168 /Wednesday, August 31, 2005 /Rules and Regulations 51913
<br />b. The restraints or requirements imposed
<br />by such factors as: Sound business practices;
<br />arm's- length bargaining; Federal, State and
<br />other laws and regulations; and, terms and
<br />conditions of the Federal award.
<br />c. Market prices for comparable goods or
<br />services.
<br />d. Whether the individuals concerned
<br />acted with prudence in the circumstances
<br />considering their responsibilities to the
<br />governmental unit, its employees, the public
<br />at large, and the Federal Government.
<br />e. Significant deviations from the
<br />established practices of the governmental
<br />unit which may unjustifiably increase the
<br />Federal award's cost.
<br />3. Allocable costs.
<br />a. A cost is allocable to a particular cost
<br />objective if the goods or services involved are
<br />chargeable or assignable to such cost
<br />objective in accordance with relative benefits
<br />received.
<br />b. All activities which benefit from the
<br />governmental unit's indirect cost, including
<br />unallowable activities and services donated
<br />to the governmental unit by third parties,
<br />will receive an appropriate allocation of
<br />indirect costs.
<br />c. Any cost allocable to a particular Federal
<br />award or cost objective under the principles
<br />provided for in 2 CFR part 225 may not be
<br />charged to other Federal awards to overcome
<br />fund deficiencies, to avoid restrictions
<br />imposed by law or terms of the Federal
<br />awards, or for other reasons.
<br />d. Where an accumulation of indirect costs
<br />will ultimately result in charges to a Federal
<br />award, a cost allocation plan will be required
<br />as described in Appendices C, D, and E to
<br />this part.
<br />4. Applicable credits.
<br />a. Applicable credits refer to those receipts
<br />or reduction of expenditure -type transactions
<br />that offset or reduce expense items allocable
<br />to Federal awards as direct or indirect costs.
<br />Examples of such transactions are: Purchase
<br />discounts, rebates or allowances, recoveries
<br />or indemnities on losses, insurance refunds
<br />or rebates, and adjustments of overpayments
<br />or erroneous charges. To the extent that such
<br />credits accruing to or received by the
<br />governmental unit relate to allowable costs,
<br />they shall be credited to the Federal award
<br />either as a cost reduction or cash refund, as
<br />appropriate.
<br />b. In some instances, the amounts received
<br />from the Federal Government to finance
<br />activities or service operations of the
<br />governmental unit should be treated as
<br />applicable credits. Specifically, the concept
<br />of netting such credit items (including any
<br />amounts used to meet cost sharing or
<br />matching requirements) should be recognized
<br />in determining the rates or amounts to be
<br />charged to Federal awards. (See Appendix B
<br />to this part, item 11, "Depreciation and use
<br />allowances," for areas of potential
<br />application in the matter of Federal financing
<br />of activities.)
<br />D. Composition of Cost
<br />1. Total cost. The total cost of Federal
<br />awards is comprised of the allowable direct
<br />cost of the program, plus its allocable portion
<br />of allowable indirect costs, less applicable
<br />credits.
<br />2. Classification of costs. There is no
<br />universal rule for classifying certain costs as
<br />either direct or indirect under every
<br />accounting system. A cost may be direct with
<br />respect to some specific service or function,
<br />but indirect with respect to the Federal
<br />award or other final cost objective. Therefore,
<br />it is essential that each item of cost be treated
<br />consistently in like circumstances either as a
<br />direct or an indirect cost. Guidelines for
<br />determining direct and indirect costs charged
<br />to Federal awards are provided in the
<br />sections that follow.
<br />E. Direct Costs
<br />1. General. Direct costs are those that can
<br />be identified specifically with a particular
<br />final cost objective.
<br />2. Application. Typical direct costs
<br />chargeable to Federal awards are:
<br />a. Compensation of employees for the time
<br />devoted and identified specifically to the
<br />performance of those awards.
<br />b. Cost of materials acquired, consumed, or
<br />expended specifically for the purpose of
<br />those awards.
<br />c. Equipment and other approved capital
<br />expenditures.
<br />d. Travel expenses incurred specifically to
<br />carry out the award.
<br />3. Minor items. Any direct cost of a minor
<br />amount may be treated as an indirect cost for
<br />reasons of practicality where such accounting
<br />treatment for that item of cost is consistently
<br />applied to all cost objectives.
<br />F. Indirect Costs
<br />1. General. Indirect costs are those:
<br />Incurred for a common or joint purpose
<br />benefiting more than one cost objective, and
<br />not readily assignable to the cost objectives
<br />specifically benefitted, without effort
<br />disproportionate to the results achieved. The
<br />term "indirect costs," as used herein, applies
<br />to costs of this type originating in the grantee
<br />department, as well as those incurred by
<br />other departments in supplying goods,
<br />services, and facilities. To facilitate equitable
<br />distribution of indirect expenses to the cost
<br />objectives served, it may be necessary to
<br />establish a number of pools of indirect costs
<br />within a governmental unit department or in
<br />other agencies providing services to a
<br />governmental unit department. Indirect cost
<br />pools should be distributed to benefitted cost
<br />objectives on bases that will produce an
<br />equitable result in consideration of relative
<br />benefits derived.
<br />2. Cost allocation plans and indirect cost
<br />proposals. Requirements for development
<br />and submission of cost allocation plans and
<br />indirect cost rate proposals are contained in
<br />Appendices C, D, and E to this part.
<br />3. Limitation on indirect or administrative
<br />costs.
<br />a. In addition to restrictions contained in
<br />2 CFR part 225, there may be laws that
<br />further limit the amount of administrative or
<br />indirect cost allowed.
<br />b. Amounts not recoverable as indirect
<br />costs or administrative costs under one
<br />Federal award may not be shifted to another
<br />Federal award, unless specifically authorized
<br />by Federal legislation or regulation.
<br />G. Interagency Services. The cost of
<br />services provided by one agency to another
<br />within the governmental unit may include
<br />allowable direct costs of the service plus a
<br />pro rate share of indirect costs. A standard
<br />indirect cost allowance equal to ten percent
<br />of the direct salary and wage cost of
<br />providing the service (excluding overtime,
<br />shift premiums, and fringe benefits) may be
<br />used in lieu of determining the actual
<br />indirect costs of the service. These services
<br />do not include centralized services included
<br />in central service cost allocation plans as
<br />described in Appendix C to this part.
<br />H. Required Certifications. Each cost
<br />allocation plan or indirect cost rate proposal
<br />required by Appendices C and E to this part
<br />must comply with the following:
<br />1. No proposal to establish a cost allocation
<br />plan or an indirect cost rate, whether
<br />submitted to a Federal cognizant agency or
<br />maintained on file by the governmental unit,
<br />shall be acceptable unless such costs have
<br />been certified by the governmental unit using
<br />the Certificate of Cost Allocation Plan or
<br />Certificate of Indirect Costs as set forth in
<br />Appendices C and E to this part. The
<br />certificate must be signed on behalf of the
<br />governmental unit by an individual at a level
<br />no lower than chief financial officer of the
<br />governmental unit that submits the proposal
<br />or component covered by the proposal.
<br />2. No cost allocation plan or indirect cost
<br />rate shall be approved by the Federal
<br />Government unless the plan or rate proposal
<br />has been certified. Where it is necessary to
<br />establish a cost allocation plan or an indirect
<br />cost rate and the governmental unit has not
<br />submitted a certified proposal for
<br />establishing such a plan or rate in accordance
<br />with the requirements, the Federal
<br />Government may either disallow all indirect
<br />costs or unilaterally establish such a plan or
<br />rate. Such a plan or rate may be based upon
<br />audited historical data or such other data that
<br />have been furnished to the cognizant Federal
<br />agency and for which it can be demonstrated
<br />that all unallowable costs have been
<br />excluded. When a cost allocation plan or
<br />indirect cost rate is unilaterally established
<br />by the Federal Government because of failure
<br />of the governmental unit to submit a certified
<br />proposal, the plan or rate established will be
<br />set to ensure that potentially unallowable
<br />costs will not be reimbursed.
<br />Appendix B to Part 225 — Selected Items
<br />of Cost
<br />Table of Contents
<br />1. Advertising and public relations costs
<br />2. Advisory councils
<br />3. Alcoholic beverages
<br />4. Audit costs and related services
<br />5. Bad debts
<br />6. Bonding costs
<br />7. Communication costs
<br />8. Compensation for personal services
<br />9. Contingency provisions
<br />10. Defense and prosecution of criminal and
<br />civil proceedings, and claims
<br />11. Depreciation and use allowances
<br />12. Donations and contributions
<br />13. Employee morale, health, and welfare
<br />costs
<br />14. Entertainment costs
<br />15. Equipment and other capital
<br />expenditures
<br />16. Fines and penalties
<br />17. Fund raising and investment management
<br />costs
<br />18. Gains and losses on disposition of
<br />depreciable property and other capital
<br />
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