SECTION J, SELECTED ITEMS OF COST - EXCERPTS ONLY

The items listed in Section J of A-21 are identified as either allowable or unallowable.  Those that are unallowable may not be charged to the Federal government as either a direct or an indirect cost.  Those that are allowable may be charged as indirect cost items (paid for from the indirect cost returns).  Those that are allowable and meet the definition of direct costs in Section D may be included in the proposed budget as direct costs.  The sponsoring agency has the option of accepting the budget as submitted, in which case those items will be paid as direct costs, or deleting those items from the budget, in which case you will need to pay for them from your indirect cost return pool.

J. General provisions for selected items of cost.

Sections 1 through 50 provide principles to be applied in establishing the allowability of certain items involved in determining cost. These principles should apply irrespective of whether a particular item of cost is properly treated as direct cost or F&A cost.  Failure to mention a particular item of cost is not intended to imply that it is either allowable or unallowable; rather, determination as to allowability in each case should be based on the treatment provided for similar or related items of cost.  In case of a discrepancy between the provisions of a specific sponsored agreement and the provisions below, the agreement should govern.

1.  Advertising and public relations costs.  (Excerpts Only)

a. The only allowable advertising costs are those which are solely for:

(1) The recruitment of personnel required for the performance by the institution of obligations arising under the sponsored agreement, when considered in conjunction with all other recruitment costs, as set forth in Section J.37;

(2) The procurement of goods and services for the performance of the sponsored agreement;

(3) The disposal of scrap or surplus materials acquired in the performance of the sponsored agreement except when institutions are reimbursed for disposal costs at a predetermined amount in accordance with Circular A-110; or

(4) Other specific purposes necessary to meet the requirements of the sponsored agreement.

b. The only allowable nubile relations costs are:

(1) Costs specifically required by sponsored agreements:

(2) Costs of communicating with the public and press pertaining to specific activities or accomplishments which result from performance of sponsored agreements; or

(3) Costs of conducting 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 contract/grant awards, financial matters, etc.

c. Costs identified in subsections c and d if incurred for more than one sponsored agreement or for both sponsored work and other work of the institution, are allowable to the extent that the principles in Sections D and E are observed.

d. Unallowable advertising and public relations costs include the following:

(1) All advertising and public relations costs other than as specified in subsections c, d, and e;

(2)  Costs of convocations or other events related to instruction or other institutional activities including:

(i) Costs of displays, demonstrations, and exhibits;

(ii) Costs of meeting rooms, hospitality suites, and other special facilities used in conjunction with shows and other special events; and

(iii) 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 institution.

2. Alcoholic beverages. (Excerpts Only) Costs of alcoholic beverages are unallowable.

3. Alumni/ae activities. (Excerpts Only) Costs incurred for, or in support of, alumni/ae activities and similar services are unallowable. 

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

5. Civil defense costs.  (Excerpts Only) Civil defense costs are those incurred in planning for, and the protection of life and property against, the possib1e effects of enemy attack.  Capital expenditures for civil defense purposes will not be allowed, but a use allowance or depreciation may be permitted in accordance with provisions set forth in Section J.12. Costs of local civil defense projects not on the institution’s premises are unallowable. 

6. Commencement and convocation costs. (Excerpts Only) Costs incurred for commencements and convocations are unallowable, except as provided for in Section F.9.

7. Communication costs.  (Excerpts Only) Costs incurred for telephone services, local and long distance telephone calls, telegrams, radiograms, postage and the like, are allowable.  (Remember to check the definition of a direct cost in Section D before including these costs in your project budget.) 

8. Compensation for personal services.  (Excerpts Only)

a. General.  Compensation for personal services covers all amounts paid currently or accrued by the institution for services of employees rendered during the period of performance under sponsored agreements. Such amounts include salaries, wages, and fringe benefits (see Subsection f). These costs are allowable to the extent that the total compensation to individual employees conforms to the established policies of the institution, consistently applied, and provided that the charges for work performed directly on sponsored agreements and for other work allocable as F&A costs are determined and supported according to standard accounting practices.

Short-term (such as one or two months) fluctuation between workload categories need not be considered as long as the distribution of salaries and wages is reasonable over the longer term, such as an academic period.

9. Contingency provisions. (Excerpts Only) Contributions to a contingency reserve or any similar provision made for events, the occurrence of which cannot be foretold with certainty as to time, intensity, or with an assurance of their happening, are unallowable. (See also Section J.21.c.) 

10. Deans of faculty and graduate schools. (Excerpts Only) The salaries and expenses of deans of faculty and graduate schools, or their equivalents, and their staffs, are allowable.

11. Defense and prosecution of criminal and civil proceedings, claims, appeals and patent infringement. (Excerpts Only)

Except as otherwise described in section J.11, costs incurred in connection with any criminal, civil or administrative proceeding (including filing of a false certification) commenced by the Federal Government, or a State, local or foreign government, are not allowable if the proceeding (a) relates to a violation of or failure to comply with a Federal. State, local or foreign statute or regulation by the institution (including its agents and employees); and (b) results in any of the following dispositions:

(i) In a criminal proceeding, a conviction.

(ii) In a civil or administrative proceeding involving an allegation of fraud or similar misconduct, a determination of institutional liability.

(iii) In the case of any civil or administrative proceeding, the imposition of a monetary penalty.

(iv) A final decision by an appropriate Federal official to debar or suspend the institution, to rescind or void an award, or to terminate an award for default by reason of a violation or failure to comply with a law or regulation. 

(v) A disposition by consent or compromise, if the action could have resulted in any of the dispositions described in Subsections (i) through (iv).

12. Depreciation and use allowances. (Excerpts Only) Institutions may be compensated for the use of their buildings, capital improvements, and equipment, provided that they are used, needed in the institutions’ activities, and properly allocable to sponsored agreements. Such compensation shall be made by computing either depreciation or use allowance.

13. Donations and contributions. (Excerpts Only)

a. The value of donated services and property are not allowable either as a direct or F&A cost, for exceptions, contact the Contracts and Grants Office.

b. Donations or contributions made by the institution, regardless of the recipient, are unallowable. 

14. Employee morale, health, and welfare costs and credits. (Excerpts Only) The costs of house publications, health or first-aid clinics and/or infirmaries, recreational activities, food services, employees’ counseling services, and other expenses incurred in accordance with the institution’s established practice or custom for the improvement of working conditions, employer-employee relations, employee morale, and employee performance, are allowable

15. Entertainment costs. (Excerpts Only) 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.

16. Equipment and other capital expenditures. (Excerpts Only)

(1) “Equipment” means an article of nonexpendable, tangible personal property having a useful life of more than one year and an acquisition cost which equals or exceeds the lesser of the capitalization level established by the organization for financial statement purposes, or $5000.

(2) “Capital expenditures” means the cost of the asset including the cost to put it in place. Capital expenditure for equipment, for example, 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.

(3) “Special purpose equipment” means equipment which is used only for research, medical, scientific, or other technical activities.

(4) “General purpose equipment” means equipment, the use of which is not limited only to research, medical, scientific or other technical activities. Examples of general purpose equipment include office equipment and furnishings, air conditioning equipment, reproduction and printing equipment, motor vehicles, and automatic data processing equipment.

b. The following rules of allowability shall apply to equipment and other capital expenditures:

(1) Capital expenditures for general purpose equipment, buildings, and land are unallowable as direct charges, except where approved in advance by the sponsoring agency.

(2) Expenditures for special purpose equipment are allowable as direct charges with the approval of the sponsoring agency.

(3) Capital expenditures for improvements to land, buildings, or equipment which materially increase their value or useful life are unallowable as direct charges, except where approved in advance by the sponsoring agency.

17. Executive lobbying costs. (Excerpts Only) Costs incurred in attempting to improperly influence either directly or indirectly, an employee or officer of the Executive Branch of the Federal Government to give consideration or to act regarding a sponsored agreement or a regulatory matter are unallowable.

18. Fines and Penalties. (Excerpts Only) Costs resulting from violations of, or failure of the institution to comply with, Federal, State, and local or foreign laws and regulations are unallowable, except when incurred as a result of compliance with specific provisions of the sponsored agreement, or instructions in writing from the authorized official of the sponsoring agency authorizing in advance such payments.

19. Goods or services for personal use. (Excerpts Only) Costs of goods or services for personal use of the institution’s employees are unallowable regardless of whether the cost is reported as taxable income to the employees.

20. Housing and personal living expenses.  (Excerpts Only)

a.   Costs of housing (e.g., depreciation, maintenance, utilities, furnishings, rent, etc.), housing allowances and personal living expenses for/of the institution’s officers are unallowable regardless of whether the cost is reported as taxable income to the employees.

21. Insurance and indemnification. (Excerpts Only)

a.   Costs of insurance required or approved, and maintained, pursuant to the sponsored agreement, are allowable. 

b.  Costs of other insurance maintained by the institution in connection with the general conduct of its activities, are allowable subject to the following limitations: (1) types and extent and cost of coverage must be in accordance with sound institutional practice; (2) costs of insurance or of any contributions to any reserve covering the risk of loss of or damage to federally-owned property are unallowable, except to the extent that the Federal Government has specifically required or approved such costs; and (3) costs of insurance on the lives of officers or trustees are unallowable except where such insurance is part of an employee plan which is not unduly restricted.

c.   Contributions to a reserve for a self-insurance program are allowable, to the extent that the types of coverage, extent of coverage, and the rates and premiums would have been allowed had insurance been purchased to cover the risks.

d.  Actual losses which could have been covered by permissible insurance (whether through purchased insurance or self-insurance) are unallowable, unless expressly provided for in the sponsored agreement, except that costs incurred because of losses not covered under existing deductible clauses for insurance coverage provided in keeping with sound management practice as well as 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. 

e. Indemnification includes securing the institution against liabilities to third persons and other losses not compensated by insurance or otherwise.  The Federal Government is obligated to indemnify only to the extent expressly provided for in the sponsored agreement, except as provided in Subsection d.

f. Insurance against defects. Costs of insurance with respect to any costs incurred to correct defects in the institution’s materials or workmanship are unallowable. 

g.   Medical liability (malpractice) insurance is an allowable cost of research programs only to the extent that the research involves human subjects. Medical liability insurance costs shall be treated as a direct cost and shall be assigned to individual projects based on the manner in which the insurer allocates the risk to the population covered by the insurance.

22. Interest, fund raising, and investment management costs.  (Excerpts Only)

a. Costs incurred for interest on borrowed capital or temporary use of endowment funds, however represented, are unallowable, except as indicated in Subsection e. 

b. Costs of organized fund raising, including financial campaigns, endowment drives, solicitation of gifts and bequests, and similar expenses incurred solely to raise capital or obtain contributions, are unallowable. 

c. Costs of investment counsel and staff and similar expenses incurred solely to enhance income from investments are unallowable.

23. Labor relations costs. (Excerpts Only) Costs incurred in maintaining satisfactory relations between the institution and its employees, including costs of labor management committees, employees’ publications, and other related activities, are allowable. 

24. Lobbying. (Excerpts Only) Reference is made to the common rule published at 55 FR 6736 (2/26/90), and OMB’s government wide guidance, amendments to OMB’s government wide guidance, and OMB’s clarification notices published at 54 FR 52306 (12/20/89), 61 FR 1412 (1/19/96), 55 FR 24540 (6/15/90) and 57 FR 1772 (1/15/92), respectively. In addition, the following restrictions shall apply:

Notwithstanding other provisions of this Circular, costs associated with the following activities are unallowable: 

(1) Attempts to influence the outcomes of any Federal, State, or local election, referendum, initiative, or similar procedure, through in kind or cash contributions, endorsements, publicity, or similar activity;

(2) Establishing, administering, contributing to, or paying the expenses of a political party, campaign, political action committee, or other organization established for the purpose of influencing the outcomes of elections;

(3) Any attempt to influence (i) the introduction of Federal or State legislation, (ii) the enactment or modification of any pending Federal or State legislation through communication with any member or employee of the Congress or State legislature (including efforts to influence State or local officials to engage in similar lobbying activity, or (iii) any government official or employee in connection with a decision to sign or veto enrolled legislation;

(4) Any attempt to influence (i) the introduction of Federal or State legislation; or (ii) the enactment or modification of any pending Federal or State legislation by preparing, distributing, or using publicity or propaganda, or by urging members of the general public, or any segment thereof, to contribute to or participate in any mass demonstration, march, rally, fund raising drive, lobbying campaign or letter writing or telephone campaign; or

(5) Legislative liaison activities, including attendance at legislative sessions or committee hearings, gathering information regarding legislation, and analyzing the effect of legislation, when such activities are carried on in support of or in knowing preparation for an effort to engage in unallowable lobbying.

25. Losses on other sponsored agreements or contracts. (Excerpts Only) Any excess of costs over income under any other sponsored agreement or contract of any nature is unallowable. This includes, but is not limited to, the institution’s contributed portion by reason of cost-sharing agreements or any under-recoveries through negotiation of flat amounts for F&A costs.

26. Maintenance and repair costs.  (Excerpts Only) Costs incurred for necessary maintenance, repair or upkeep of property (including Federal property unless otherwise provided for) which neither add to the permanent value of the property nor appreciably prolong its intended life but keep it in an efficient operating condition, are allowable. 

30. Plant security costs. (Excerpts Only) Necessary expenses incurred to comply with security requirements, including wages, uniforms and equipment of personnel engaged in plant protection, are allowable.

31. Preagreement costs. (Excerpts Only) Costs incurred prior to the effective date of the sponsored agreement, whether or not they would have been allowable thereunder if incurred after such date, are unallowable unless approved by the sponsoring agency.

32. Professional services costs. (Excerpts Only)

a. Costs of professional and consulting services, including legal services rendered by the members of a particular profession who are not employees of the institution, are allowable, subject to Subsection b and Section J. 11 when reasonable in relation to the services rendered and when not contingent upon recovery of the costs from the Federal Government. Retainer fees, to be allowable, must be reasonably supported by evidence of services rendered.

b. Factors to be considered in determining the allowability of costs in a particular case include

(1) the past pattern of such costs, particularly in the years prior to the award of sponsored agreements; (2) the impact of sponsored agreements on the institution’s total activity; (3) the nature and scope of managerial services expected of the institution’s own organizations; and (4) whether the proportion of Federal Government work to the institution’s total activity is such as to influence the institution in favor of incurring the cost, particularly where the services rendered are not of a continuing nature and have little relationship to work under sponsored agreements.

33. Profits and losses on disposition of plant equipment or other capital assets. (Excerpts Only) Profits or losses arising from the sale or exchange of plant, facilities, equipment or other capital assets, including sale or exchange of either short-term or long-term investments, shall not be considered in computing the costs of sponsored agreements except for pension plans as provided in Section J.8.f.  When assets acquired with Federal funds, in part or wholly, are disposed of, the distribution of the proceeds shall be made in accordance with Circular A- 110.

34. Proposal costs. (Excerpts Only) Proposal costs are the costs of preparing bids or proposals on potential federally and non-federally-sponsored agreements or projects, including the development of data necessary to support the institution’s bids or proposals. Proposal costs of the current accounting period of both successful and unsuccessful bids and proposals normally should be treated as F&A costs and allocated currently to all activities of the institution, and no proposal costs of past accounting periods will be allocable to the current period. However, the institution’s established practices may be to treat proposal costs by some other recognized method. Regardless of the method used, the results obtained may be accepted only if found to be reasonable and equitable.

35. Rearrangement and alteration costs. (Excerpts Only) Costs incurred for ordinary or normal rearrangement and alteration of facilities are allowable. Special arrangement and alteration costs incurred specifically for the project are allowable when such work has been approved in advance by the sponsoring agency.

36. Reconversion costs. (Excerpts Only) Costs incurred in the restoration or rehabilitation of the institution’s facilities to approximately the same condition existing immediately prior to commencement of a sponsored agreement, fair wear and tear excepted, are allowable.

37. Recruiting costs. (Excerpts Only)

38. Rental cost of buildings and equipment. (Excerpts Only)

39. Royalties and other costs for use of patents. (Excerpts Only) Royalties on a patent or amortization of the cost of acquiring a patent or invention or rights thereto, necessary for the proper performance of the sponsored agreement and applicable to tasks or processes there under, are allowable unless the Federal Government has a license or the right to free use of the patent, the patent has been adjudicated to be invalid or has been administratively determined to be invalid, the patent is considered to be unenforceable, or the patent has expired.

41. Scholarships and student aid costs. (Excerpts Only)

42. Selling and marketing. (Excerpts Only) Costs of selling and marketing any products or services of the institution (unless allowed under Section J. i.e. or J.34) are unallowable. 

43. Severance pay. (Excerpts Only)

a. Severance pay is compensation in addition to regular salary and wages which is paid by an institution to employees whose services are being terminated. Costs of severance pay are allowable only to the extent that such payments are required by law, by employer-employee agreement, by established policy that constitutes in effect an implied agreement on the institution’s part, or by circumstances of the particular employment.

44. Specialized service facilities. (Excerpts Only)

a. The costs of institutional services involving the use of highly complex or specialized facilities such as electronic computers, wind tunnels, and reactors are allowable, provided the charge for the service meets the conditions of Subsections b through d.

b. The cost of each service normally shall consist of both its direct costs and its allocable share of F&A costs with deductions for appropriate income of Federal financing as described in Section C.5.

45. Student activity costs. (Excerpts Only) Costs incurred for intramural activities, student publications, student clubs, and other student activities, are unallowable, unless specifically provided for in the sponsored agreements.

46. Taxes. (Excerpts Only)

a.  In general, taxes which the institution is required to pay and which are paid or accrued in accordance with generally accepted accounting principles are allowable. Payments made to local governments in lieu of taxes which are commensurate with the local government services received are allowable, except for (I) taxes from which exemptions are available to the institution directly or which are available to the institution based on an exemption afforded the Federal Government, and in the latter case when the sponsoring agency makes available the necessary exemption certificates; and (2) special assessments on land which represent capital improvements.

47. Transportation costs. Costs incurred for freight, express, cartage, postage, and other. (Excerpts Only)

transportation services relating either to goods purchased, in process, or delivered, are allowable. When such costs can readily be identified with the items involved, they may be charged directly as transportation costs or added to the cost of such items. Where identification with the materials received cannot readily be made, inbound transportation cost may be charged to the appropriate F&A cost accounts if the institution follows a consistent, equitable procedure in this respect. Outbound freight, if reimbursable under the terms of the sponsored agreement, should be treated as a direct cost.

48. Travel costs. (Excerpts Only)

a. General. Travel costs are the expenses for transportation, lodging, subsistence, and related items incurred by employees who are in travel status costs may be charged on an actual 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 not to selected days of the trip, results in reasonable charges, and is in accordance with the institution’s travel policy and practices consistently applied to all institutional travel activities.

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 institution in its regular operations as a result of an institutional policy and the amounts claimed under sponsored agreements represent reasonable and allocable costs. In the absence of an acceptable institutional policy regarding travel costs, the rates and amounts established under subchapter I of Chapter 57 of Title 5, United States Code, or by the Administrator of General Services, or the President (or his or her designee) pursuant to any provisions of such subchapter shall apply to sponsored agreements (41 U.S.C. 420).

c. Commercial air travel. Airfare costs in excess of the lowest available commercial discount airfare, Federal Government contract airfare (where authorized and available), or 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 costs that would offset transportation savings; or offer accommodations not reasonably adequate for the medical needs of the traveler.  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 institution 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 institution-owned, -leased, or

-chartered aircraft," as used in this Subsection, includes the cost of lease, charter, operation (including personnel costs), maintenance, depreciation, insurance, and other related costs. Costs of travel via institution-owned, -leased, or -chartered aircraft shall not exceed the cost of allowable commercial air travel, as provided for in Subsection c.

49. Termination costs applicable to sponsored agreement. (Excerpts Only)

a. Termination of sponsored agreements generally gives rise to the incurrence of costs or to the need for special treatment of costs, which would not have arisen had the agreement not been terminated. Items peculiar to termination are set forth below. They are to be used in conjunction with all other provisions of this Circular in the case of termination.  Contact the Contracts and Grants office for additional information.

50. Trustees. (Excerpts Only) Travel and subsistence costs of trustees, regardless of the purpose of the trip, are unallowable.