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CP5?
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                                TABLE  OF  CONTENTS
    PREFACE

    SECTION  I-
    SECTION  II-

    SECTION  III-



    APPENDIX 1-

    APPENDIX 2-



    APPENDIX 3-

    APPENDIX 4-


    APPENDIX 5-
Indirect Cost  -  General Information
Nature of  Indirect Costs
Indirect Costs on EPA Grants
Indirect Cost  Rate
Provisional  Rate
Final Rate

Preparation  of Indirect Cost Proposal

Submission of  Indirect Cost Proposal
General Information
Supporting Documentation

Sample Indirect  Cost Proposal Format

Information  Needed.from the Organization
for an Evaluation of an Indirect Cost
Rate Proposal

OMB Circular No. A-122, Lobbying Revision

OMB Circular No. A-122, Cost Principles
for Nonprofit  Organizations

Sample Form-Certification b'y an Authorized
Nonprofit  Organization Official
Page No.

   1

   2
  3-4

   5



  6-8

   '9



 10-31

 32-45



   46
O
CO

S3
CO
                                U.S. EPA Headquarters Library
                                     Mail code 3201
                                1200 Pennsylvania Avenue NW
                                  Washington DC 20460 -
             HEADQUARTERS UBSA8Y
             ENVIRONMENTAL PROTECTION AGENCY
             WASHINGTON, D.C. 20460
                                                                                 .

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PREFACE

This brochure is a guide for nonprofit organizations subject to the
provisions of Office of Management and Budget (OMB) Circular A-122 to
assist in understanding the concept of indirect cost rates and to help
in preparing indirect cost rate proposals for Federal grants.  The
guidelines apply to most situations for nonprofit organizations.

     Section I provides general information on the nature
     of indirect costs and indirect cost rates.

     Section -II provides guidelines for preparing, an indirect
     cost proposal.

     Section III provides guidelines for submission of an indirect
     cost proposal.

     Appendix 1 provides a sample indirect .cost proposal format.

     Appendix 2 provides the information needed from the
     organization to support an indirect cost rate proposal
     and EPA's.evaluation.
   s                                                       *
     Appendix 3 includes revision to OMB Circular A-122, "Cost
     Principles for Nonprofit Organizations", to clarify
     requirements for maintenance and access.to records for
     costs associated with legislative lobbying and political •
     activities.

     Appendix 4 includes OMB Circular .A-122, "Cost Principles
     for Nonprofit Organizations".

     Appendix 5 includes a sample form of a certification by
     an authorized organization official..

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SECTION I_ ^ Indirect Costs ^ General Information

Nature of Indirect Cos t s^

Indirect costs are joint or common costs benefiting more than one
program and not readily identifiable with a specific program.  Rent,
heat, light, power, accounting, payroll, personnel, and administration
are costs typically considered indirect costs.

Indirect Costs on EPA Grants

If indirect costs are proposed on a grant, the means by which the
indirect cost are estimated must be supported by either, (1) a federally
approved indirect cost agreement effective for the period of performance
of the grant or, (2) an indirect cost proposal which supports the
indirect costs proposed.

Indirect Cost Rate

The easiest means to determine the amount of common or Joint costs to be
borne by each program is to use an indirect cost rate.  An indirect cost
rate is computed by grouping joint or common costs into a pool and
dividing the pool by a cost base common to all programs.  The result is
an indirect cost rate.  The rate is applied to the base costs of a
program to determine the share of indirect cost to be allocated to that
program.

An indirect cost rate is not a percentage that is guessed at.  It is a
logical means to determine the amount of joint or common costs each
program should.bear.  The rate is computed using accounting data (budget
or actual) of the organization and a base that approximates benefits
received from the indirect cost pool.

Indirect costs are reimbursed based on an organization's indirect cost
rate, subject to any statutory or administrative limitations, OMB
Circular A-122 "Cost Principles for Nonprofit Organizations", or the
Environmental Protection Agency grant regulations.

Provisional Rate       .
A provisional indirect cost rate is an estimated rate established to
permit funding and reporting indirect 'costs pending establishment of a
final rate.  The.estimated rate may be based on actual costs of-the most
recently completed fiscal year or budgets.  But, in any case, the
provisional rate should be calculated using the best estimate of what is
expected to be incurred during the performance period of the grant.

Final Rate

A final indirect cost rate is a permanent rate established after actual
costs for a specific period (usually a fiscal year) are known. Final
rates are used to adjust indirect costs initially claimed based on
provisional rates.

                                - 2 -

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 SECTION  II  -  Preparation  of  an  Indirect- Cost Proposal
 There  is  no  single  method  to  prepare  an indirect cost rate proposal.
 There  are as many methods  as  accounting systems.  However, there are
 several basic steps that must be  followed in all cases.   These steps
 are:                .

      1.   Determine  the  Accounting Data.  The first step  i-n preparing  an
 indirect  cost rate  proposal  is to decide on the  accounting data1 to use
 for  estimating the  indirect  cost  rate:  historical costs or budgetary
 data.  For estimating future  rates, the data selected should approximate
 the  costs that will be  incurred during the performance of the grant.

     '2.   Classify Costs.   Once the accounting basis for.  estimating the
 rate  is selected, the next.and most difficult step, is to analyze each
 element of cost and decide which  costs are indirect and  which are
 direct.   Because of the diverse characteristics  and accounting practices
 of nonprofit organizations,  it is- not possible to specify the types of
 cost which may be classified  as indirect in all  situations.  But, there
 are  two fundamental concepts  to keep  in mind when classifying costs:  1}
 indirect  costs are  joint or  common costs and 2)  costs must be treated
 consistently.

      Indirect costs.are costs incurred for common or joint purposes and
 cannot be readily identified  to a particular final cost  objective such
 as a Federal grant. Office  rent  or general accounting are good and
 obvious examples of .joint  or  common costs that cannot be easily
 identified to a specific program. Personnel administration and office
 supplies  are other  examples  of Joint  or common costs.
      ,/
      It is imperative to treat cost consistently for all .programs and
 activities of the organization.  If a cost is treated as a direct cost
 for  the Federal program, the  same type of.cost.incurred  for another
 program should be treated  as  a direct cost to that program.  For .
 example,  if  long distance  telephone costs are direct charged to Federal
 Grant  #1, long distance telephone costs of other programs should be
 classified as direct costs,  and not included in  the indirect cost pool.
 (However, long distance telephone cost associated with allowable
 administrative efforts-can be classified as an indirect  cost.  See
 Footnote  1.}                                                 ,

  All  administrative  costs  could  be  classified  as  joint or  common costs.
 However,  some efforts  which  may  be  considered   administrative by the
 organization, are .not  allowable  or  allocable to Federal  programs.
.Functions  such as fund raising,  services  to members  and  clients  or
 services  to  the  general  public when significant and  necessary to the
 mission of the organization,  are not indirect  costs  allocable.to Federal
 programs  and must be classified  as  direct cost in accordance  with OMB
.Circular  A-122.
                                  -  3  -

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     Local telephone cost, would be very di-fficult to identify-'directly
to a. specific program without, a lot of effort or without dedicating
phones ,to specific, programs, neither of .which seems very practica.l.  So,
in most'situations, all local telephone costs should be classified as
indirect costs.      -

     Thus, telephone cost is broken down between local and long
distance.  Since local telephone costs would be difficult and
impractical to direct charge to all programs, all local telephone costs
are classified as indirect and allocated-to all programs - a consistent
treatment.  Long distance calls are identified to specific programs and
administration where the calls were in support of allowable
administrative efforts - also a consistent treatment.  An analysis
similar to the one done on telephone costs should be performed for each
element of cost to determine direct/indirect classification.

     3-  Select the Allocation Base.  After all costs have been
classified as direct or indirect, the next step is to select the
allocation base.  The allocation base should provide a reasonable
approximation, of- the benefits received by a program from the -costs of
the functions and services in the indirect cost pool.  He prefer an
allocation base of salaries and wages.  Our experience has shown that
most functions and services which .comprise the cost in an indirect cost
pool benefit people.  Therefore, a base that is a factor of people, such
as salaries and wages, usually is a fair and equitable base.  Total
direct cost bases tend to overallocate indirect costs to large dollar,
non-personnel costs such as subcontracts and travel, while the functions
and services in the indirect cost pool do not provide benefits to the
same degree.  This does not mean that other bases may not be used.  If a
base other than salaries and wages is demonstrated by the -organization
to be more equitable, that base may be used.

     4.  Calculate the Rate. • The final step is to divide the indirect
cost pool by the allocation base and the result is the indirect cost
rate.  Appendix 1 is a detailed example of a suggested method for
computing an indirect cost rate.  It is only an example and not a
prescribed method.  Your proposal should fit your accounting system.
However, this method will fit most situations and provide an excellent
means to compute an indirect cost rate.
                                - 4 -

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SECTION III. ^ Submission of an Indirect Cost Proposal
General
The indirect cost proposal, or evidence that the proposal was approved
by a Federal agency/ should be submitted with the grant application.  An
indirect cost proposal documents how the organization develops and
applies its indirect cost rate.  All claims for indirect'costs must be
supported by an indirect cost rate proposal.  Organizations that do not
prepare indirect cost proposals risk losing their claims for indirect
costs.  The indirect cost rate proposal will be used to establish a rate
for funding indirect costs under the grant.  Guidelines on the
preparation of an indirect cost proposal are provided in Section II.

Supporting Docume n t a t ion

The estimated indirect costs and allocation base must be. supported by
either the accounting history {actual costs), budgeted costs, or a
combination of both.  If the estimated indirect costs are based on
actual costs.for the most recently completed fiscal year,  the proposal
must be accompanied by, and be cross-referenced and reconciled to, the
organization's audited financial statements which account for all
activities.  When audited financial statements are not available, the
organization should use the accounting records.  If the estimated
indirect costs are based on the organization's budget, the budget and
financial statement for the most recently completed fiscal year must be
submitted with the proposal.

In addition, .the indirect cost rate proposal must contain a
certification by an authorized organization official that the proposal
has been prepared in accordance with Office of Management and Budget
Circular A-122 (see Appendix 5).

Appendix 2 contains a detailed list of the information and documentation
that should be submitted with an indirect cost rate proposal. •
                                - 5 -

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                                                        APPENDIX  1
Notes t                •       •
                                                                  j
1. .For this example, the amounts are taken from the organization's
independently audited financial statements.  Expenditures reflect the
purpose for which costs shown under total expenditures were incurred.
They may.be identified from  (a) the Statement of Functional.Expenses
which is frequently included with the financial statements, (b) the
accounting records maintained by the organization, or  (c) an analysis of
the costs in relation to the operation of the organization.           .  .

2. Salaries and wages, whether .treated as direct costs or indirect
costs, will be based on documented payrolls approved by a responsible
official of the organization.  The distribution of salaries and wages to
Federal grants must be supported by personnel activity reports, such as
time sheets, to account for all actual work performed for which .the
employees are compensated.  Also, indirect salaries and wages must be
supported by personnel activity reports where the employees performed a ,
combination of indirect cost and direct cost activities.  Salaries and
wages fo'r, employees performing all indirect cost activities, such as
administration, accounting, etc., are classified as indirect costs.  For
example, no accounting costs will be treated as direct costs to grants
or other activities since these costs are treated as indirect costs.
           •*" •*-"•«'-:: -* . •        *
3. Fringe benefits paid by an organization for their employees could
consist of paid vacations, holidays and sick leave, health and life
insurance, FICA,  workmen's compensation, and retirement.  Fringe
benefits, in this illustration, are all. treated as indirect cost.
However, fringe benefits may be allocated based on a fringe benefit' rate
and distributed on the basis of salaries and wages (excluding costs for
vacations, holidays and sick leave).                             •     •

4. In this illustration, all costs for office-rental, repairs and
maintenance, and supplies are classified as.indirect costs.

5. Specific identification (e.g., requisitions, purchase orders)
procedures are used as the basis for charging these costs to
benefiting activities (including Federal grants).

6. The cost of long di-stance calls are charged directly to^benefiting
activities (projects/programs, Federal grants,  and indirect
functions).  When any costs for long distance calls are specifically
identified as direct costs to Federal grants, all other costs for long.
distance calls would not be classified as indirect costs since this
would be an inconsistent treatment of costs.  Therefore, if the cost
of long distance  call are identified as direct costs to Federal
grants, all other costs for long' distance calls must be specifically
                                - 7 -

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                                                        APPENDIX 1
Notes;      .'."-•

Identified to other projects/programs, and indirect functions to be
consistent in the treatment of costs.  If records are not maintained
for identifying the direct costs, the total costs for all long
distance calls would be classified as indirect.  Cost of local calls
and monthly service charges are classified as indirect costs.

7. These.adjustments eliminate unallowable costs identified in OMB
Circular A-122 from the indirect cost pool.  Examples of unallowable
costs include interest expense, entertainment expense, lobbying, bad
debts or allowances for. doubtful" accounts, f-ines and penalties, losses
on Federal or non-Federal projects, provisions for contingencies, and
charitable contributions.                                     •        "
      , \    ~        '
8. Includes labor, fringe benefits and other costs associated with
fund raising, public relations and maintenance of membership rolls.
These types of costs are not allocable to Federal programs and must be
classified as direct costs in accordance with OMB Circular A-122.

9.,Only current expenditures should be considered in developing
indirect cost rates.  Therefore, capital expenditures (e.g.,
alteration and improvement costs) should be removed from the indirect
cost pool.'  However, the organization may include depreciation or use
allowance associated with those assets in accordance with Circular A-
122.  "   .'     •    •-•••'         • •  ' '  -
                                - 8 -

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                                                           APPENDIX 2
    INFORMATION/DOCUMENTATION NEEDED FROM THE NONPROFIT ORGANIZATION
      The  nonprofit  organization will  need to submit the following
 information  or  documentation to support the'.indirect cost rate
 proposed:

 1.   A copy of the organization's most recently audited financial
 statements if this  is  the  basis for the indirect cost rate proposal
 along with a reconciliation  of  the  proposal  to the audited financial
 statements,  in  total and  by  cost center.

 2.   A copy of the organization's fiscal year budget if this is the basis
_;for  the  indirect cost  rate proposal along with a reconciliation of the
 proposal  to  the budget.   A copy of  the most  recently audited financial
 statements may  be reguested  for EPA's evaluation of .the budget.

 3.   A list of grants .active  during-the indirect .cost rate proposal
 period and a copy of the  budget data  for the grant application. The
 grants should be identified  by  purpose, amount, period covered and
 numbers  assigned by the Federal agency.  Indicate if the grants provide
 for  payment  of  indirect costs.

 4.   A schedule  of indirect salaries.   The schedule should include job'
 title, amount and brief description of duties.  Some salaries may need-
 to be allocated between direct  and  indirect • activities.  The amount
 allocated to each activity or function should be identified along with
 description  of  the  direct  and indirect duties, shown separately,       ,
 should be provided.

 5.   A schedule  of fringe  benefits and payroll taxes by type and
 amount.   Explain the method  by  which  fringe  benefits are
 charge/allocated- to activities  (project/programs, Federal grants, and
 indirect  functions).

 6.   A certification by an  authorized  organization.official that "the
 indirect  cost proposal has been prepared in  accordance with Office *"*
 of Management and Budget  Circular A-122 (see.Appendix 5).

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                                                  APPENDIX
                 EXECUTIVE OFFICE OF THE PRESIDENT
                  OFFICE OF MANAGEMENT AND BUDGET
                        WASHINGTON. O.C. ZO903

                       - May 19,  1987

M-87-24


                                    CIRCULAR NO.  A-122,  Revised
                                    Transnittal Memorandum No.  2

TO THE HEADS OF EXECUTIVE DEPARTMENTS  AND AGENCIES

SUBJECT:  Cost Principles  for  Nonprofit  Organizations.


     This memorandum  revises OMB Circular A-122,  'Cost Principles
for Nonprofit Organizations, to  clarify  requirements for  .
maintenance and access to  records for  costs associated with
legislative lobbying  and political activities.

     In attachment B,  section  B21, "Lobbying," paragraph c.(4)  is
revised as follows:

    c.(4)  Time logs,  calendars, or similar records shall not
    be required to be created,for purposes  of complying with this
    section during any particular calendar  month when:  (1) the
    employee engages  in lobbying (as defined in paragraphs (a)
    and  (b) above) 25 percent  or less of the employee's
    compensated hours of employment during  that calendar month,
    and  (2) within the preceding five-year  period, the
    organization  has  not materially misstated allowable or
    unallowable costs of any nature, including legislative
    lobbying costs.   When conditions  (1) and  (2) above are met,
    organizations are not required to establish  records to
    support the allowability of claimed costs  in addition to
    records already  required or maintained.  Also, when
    conditions  (1)  and (2) above are met, the  absence of  time
    logs,  calendars,  or similar records will  not serve  as a basis
    for disallowing  costs by contesting estimates of lobbying
    time  spent  by employees during a calendar  month.
                                  XTi rector «^^
                            10 -

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    Friday
    April 27, 1984

    Part VII

                         • *'    '    • ~S

    Office  of

    Management and

    Budget	

    Circular A-122: Cost Principles for
    Nonprofit Organizations; "Lobbying"
    Revision

    Department of Defense
    General Sendees Administration  .
    National .Aeronautics and Space
    Administration

    48 CFR Part 31
    Federal Acquisition Regulation; Rnal Rule
-  11  -

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18260
Federal Register / Vol. 49, No. 93 / Friday. April 27.1964 / Notices
OW1C8 Of MANAOEMCKT AND
BUDGET

Ocular A-132; C
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                                   Register •Vol. 49. No.  83 / Friday. April 27. 1984  /  Notices
                                                                      18281
     lengthy, dialcsrue between OMB and
     affected groups.
       The most important changes from the
     January proposal were:
       • Adoption of an allocation method of
     accounting for the costs of lobbying and
     related activities:
       • A more limited definition of
     unallowable casts: and
       * Clarifications and limits on
     reporting and recordkeeping
     requirements in the joint cf the
     Paperwork Reduction Act.
       the November 1983 proposal initially
     provided for a 45-day public comment
     penod. 48 FR 30860-50871. Aj a result of
     the interest shown by the public and
     Congress and the large volume of
     comments received by OMB. the
     comment penod was extended for thirty -
     days until January id. 1934. 48 FR 56463-
     56464..
       By the end of the public comment
     penod. OMB had recewea some 93.800
     separate comments. Of ±eae. some
     37.500 (93.5*) favored the proposed
     revision without further changes: some
     4.175. (4.5%) opposed the revision or
     sought further modifications: and some
     1.92S (2.0%) did not clearly express
     either support or criticism. These totals
   • include only individually mailed
     comments: bulk packages of letters.
     including form letters  and petitions.
     were counted-as single comments.
       In finalizing the revision. OMB has
     carefully reviewed each of the
     comments received. .The November
     proposal has been further amended in
     several significant respects, and the
     final  version addresses many of the
     concerns raised by the critical
     comments. OMB also has conducted
     extensive discussions with interested
     aembers of Congress  and their staffs.
     particularly members of the House
     Government Operations Committee and
     the Senate Subcommittee on
     Intergovernmental Relations; Prior to
     publication of the November proposal,
     OMB had net extensively with
     Committee staff to review their
     concerns, and several  major
     modifications were made to the
,     proposal to accommodate their
     suggestions. OMB has continued to meet
     with die Committee staffs during the
     public comment period and. following
     development of the final language of the
     revision. OMB has reviewed this
     language with the Committees on
     several occasions. In addition. ONfB has
     met with the General Accounting Office
     at various stages of, the process and is
     authorized to state that the Comptroller
     General believes that OMB has the clear
     legal  authority to issue the Circular
     amendment published today, and that
     he supports it
 in. Summary of the Revision
   The revision amends Circular A-122
 to define certain lobbying activities by
 nonprofit Federal grantees and
 contractors as unallowable costs which
 cannot be paid for with Federal funds.
 The most significant provisions make
 costs of the following activities
 unallowable:
   • Federal, state or local electioneering
 and support of such entities as campaign
 organizations and political action
 committees:
   • Most direct lobbying of Congress
 and. with uie exceptions noted below.
 state legislatures, to  influence
. legislation:
   • Lobbying of the  Executive Branch in
 connection  with decisions to sign or
 veto enrolled legislation:
   • Efforts  to utiiizie state or local
 officials to lobby Congress or state
 legislatures:
   • Grassroots lobbying concerning
 either Federal or state legislation: and
   • Legislative liaison activities in
 support of unallowable lobbying
 activities.
   The revision is considerably less
 encompassing than the earlier proposals
 and the current regulations of other
 agencies governing for-prefit
 contractors, in that it doea not cover:
   • Lobbying at the local level
 (unallowable under both the Federal
 Acquisition  Regulation (FAR) and the
 Defense Acquisition  Regulation (OAR)
 supplement  to the FAR);
   • Lobbying to influence state
 legislation, in order to directly reduce
 the cost of performing the grant or
 contract or  to avoid  impairing the
 organization's authority to do so
 (covered under the current FAR, DAR
 supplement and the January 1983
 proposal):
   • Lobbying in the form of a technical
 and factual  presentation to Congress or
 state legislatures, at their request
 (unallowable under the current DAR
 supplement  to the FAR);
   • Contacts with Executive Branch
 officials other than lobbying for the veto
 or signing of enrolled bills (covered
 under the January 1983 proposal): and
   • Lobbying on regulatory actions
 (covered under the January 1983
 proposal).
   In particular, the revision will make
 unallowable only the portion of costs
 attributable  to lobbying (the
 "allocation" approach)—not as in the
 January 1983 proposal, entire cost items
 used in part  for political advocacy (the
 so-called "tainting" approach). -
   The revision will provide relief from
paperwork and audit burdens for
nonprofit organizations (and. under a
 simultaneous change being made in the
 FAR. for government contractors). For
 example, indirect cost employees (such
 as executive directors) will not be
 required to maintain time logs or
 calendars [for the portion of their time
 treated as an indirect cost) if they certify
 in good faith that they spend less than
 25% of their work time in defined
 lobbying activities. Moreover, the clear
 standards provided by the revision will
 prove of substantial benefit to nonprofit
 grantees ir. Audit iiruations by :>>duCL.-.|
 the resources necessary ;c rasoi.-e
 whether Federal r~-.dj  were jpent on
 -unallowable activities.
   The penalties for violating iiie
 revision will b« the same as fcr any
 other cost principle in CMS Circular .A-
 122. The standard remedy is recovery of
 the misspent money. Ic cases of serous •
 abuse, however, the grant or contract
 may  be suspended or •.imzi&ietL ar the
 recipient may be ueoarrso, re  the
 following:
   1. The definitional term '.'obbying and
 related activities" !\as been changed :o
 "tabbying.'
   Numerous commenters expressed
 concern that the term "related
. activities" could be used in cae future to
 expand the scope of unallowable
 acivities beyond what is explicitly
 defined as unallowable: This was not
 OMB's intent which was merely to use
 the most appropriate term for describing
 the unallowable activities, which
 include electioneering and activities  '••
 supporting unallowable lobbying, as
 well  as what is normally thought of a
 "lobbying."
   The original term for the activities
 defined as unallowable (in the January.
 1983  proposal] was  'political advocacy."
 That term was changed to "'.cbbyuig and
 related' activities" in the Novemoer
 proposal and has now been revised :o
 -"lobbying." Deletion 01' the term "related
 activities" does not affect the continuing
 disallowance of "costs associated with"
 unallowable lobbying— including those
 activities undertaken to facilitate that
 lobbying.
   2. The restrictions on direct
 legislative lobbying and grassroots
 lobbying have been clarified :a caver
 attempts to influence "the introduction
 of legislation " and "the enactment or
as
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Federal  Register /  Vol. 49.  No. 83  /  Friday.  April Z7.  1984 / Notices
 modification of' * pending
 legislation." Sections a(3)
      t(4).
   Thia change makes man precise tht
 'scop* of tht activities disallowed, and
 conforms to the IRS definition of
 lobbying.
   3. The "legislative liaison"provision
 has been made less restrictive, and
 clarified. Section a(S).
   IB the November proposal, all
 legislative liaison was deemed to be
 unallowable unless it did not relate to
 otherwise unallowable activities.
 Commenters complained that this
 lection was both coo confusing, because
 it employed a double negative, and too
 restrictive. Section a(5) has beta revised.
 to clarify that legislative liaison is   •••
 unallowable only "when such activities
 are carried oh in support of or ia
 knowing preparation for as effort to
 engage in unallowable lobbying," as
 defined in the revision.
   4. The exception for providing
 assistance ia response to a "specific
 written request" has been broadened to
 facilitate easier usage aad hat been
 narrowed in other rtspevts. Section b(l).
   The final version, has been broadened
 by deleting the "specific written
 request" requirement aad permitting
 oral requests, if properly documented:
 allowing "cognizant staff members" (ia
 addition to Congressmen) to  make such'
 requests: asd ™«iH'^j Congressional
 Record notices sufficient to invoke tht
 exception.
   The exception also has beta
 narrowed in certain respects by limiting
 it to information derived from grant or
 contract performance that is  conveyed
 in "hearing testimony, statements or
 letters" and requested by legislative
 sources; requiring presentations to be
 "technical «M factual." fnd further
 requiring that the information ia "readily
 obtainable and can be readily put in
• deliverable fora." Further, this uat.of tht
 term "technical and factual
 presentation" avoids use of the
 exception whenever technical aad
 factual information ia provided ia any
 manner of lobbying presentation aad
 Likewise avoids tht requirement that
 brief advocacy qgncliwffnt following
 technical and factual presentations
 require separate accountings and
 disallowances.
  The costs of travel lodging or meals
 involved in lobbying activities which
would otherwise be unallowable under
tht terms of section a(3] art nonetheless
made allowable if expended for tht
purpose of offering Congressional  •
hearing testimony pursuant to written
request of tht Committee's Chairman or
Ranking Minority Member for a
technical *fnj fsf^nl presentation.
   1 Tht state nraivtr clause ia the state
 tabbying exception hoi bttn deleted
 and tht scope of the exception clarified.
 Section b(J).
   The state waiver clause was added to
 the November 1983 notice ia response to
 concerns raised by some nonprofit
 organizations. It would have permitted
 states to make allowable all state
 lobbying by their subgrantets. Upon
 further review, however, the clause was
 determined to be confusing and
 superfluous. Further, under none of
 Circular A-122'j other SO cost categories
 do states have the right to override
 Federal cost standards.
   Two significant clarifying changes
 have been made ia new  section b(2). - -.
 First the "lobbying" covered by the
 exception has been explicitly limited to
 lobbying made unallowable by section
 a(3k thus, for example, grassroots
 lobbying (covered  under section a(4)J
 does not come within the exception.
 Second, the exception has been
 reworded to apply to efforts to influence
 state legislation affecting an
 organization's authority  to perform a •
 gnat contract or omer  agreement and
 efforts to reduce the costs to the
 organisation of such performance. The
 original language, applying to an
 organization s "ability" to perform the
 grant, contract or other agreement was
 deemed too broad.
   9.  The exception foe "activity in
 connection wjth an empioytt's service
 at an ejected or appointed official or
 member of a governmental advisory
 board" wot deleted. Section c(3) in
 November proposal
   Tma provision waa put in the Jaauary
 1983 proposal to prevent part-time
 government officials from being subject
 to complete; non-reimbursement aa a
 retail of the "tainting" principle. Since
 tat allocation method is  now used, tht
 exception la irrelevant and would open
 major loopholes.
   7. Tht "disclosure" requirement
 relating to tht indirect cost rate
propoool hat ott>n  dariffta ana
 explicitly tied to existing accounting
 guidelines. Section cf.1),
   Tht November proposal had required
 a statement "Identifying  by category,
 costs attributable in whole or in pan to
 lobbying" and "stating how they are,
 accounted for."     .
   Section c(l) now simply requiree that
 total lobbying costs "be separately
 identified" in the indirect cost rate
 proposal and treated consistently with
 other unallowable activity eoatt. aa
 required by the operative Circular A-122
 accounting provision.
   a. Tht Circular A-122 certification
 requirement hat beta changed to
                                                                                     in
conform to the Defense aad GSA
November 1983 proposal. Section c(2).
  Tht November propossl'j csrtiflcation
requirement pertains to the "Financial
Stints Report" which is prepared oa an
individual grant basis. However. mos<
lobbying activities are accounted for in
an entity's indirect costs, which art
calculated on an organization' wide
basis. Thus,  the appropriate place to
certify stich costs is  in the Indirect Cost
Rate Proposal as required tasder the
Defense ifld GSA (FAR) epp-'jach. The.; .
final version has been changed to .-euect
this fact
  3. The iampiage expiajiixg :he  "Z2'*
Rule" exception for n
been clarified- Section i;(4}.
  Some commentera said
annual period the 2S£ ruitt ".u
oeattd retroactively p
Intensive Jatt-year toboytiMi could
remove the ruie'j paperwork ?!vux;-3z\
for persona who aad previously
estimated that the 25ft trigger wooia act
be exceeded. Other commea^r? MIC it
was unclear whether the -ui» was to oe
bated oa 40-hour weeks or the actual
hours worked In response, ihe phrase
"2SH of the time" baa been revised to
"23* of hit compensated hours of
employment during that calendar
month."

V. Putpass of thei Revision

  As sat forth at greater length is tfca
preambles to the January ana November
notices, tht purpose or this re^sicn is is
establish comprehensive, goyeroraent-
wide cost principles to ensure '.flat
nonprofit Federal grantees and .   .
contractors do not lutaeprccrtaitti
rands for lobbying activities. Thi«
principle is achieved by disallowing -Jii
recovery of lobbying costs in a a»aaa«r
consistent with the treatment undsr
Circular A-122 of other cosu which vs
diaailowtd on grounds of public pofc;-.
In adopting this revision. OMB does ooi
inland to discourage or penalize
nonprofit organizations iroa w
lobbying efforts ^vltfa thei* own non-
Federal funds. The sole putpcse 01
revision ia to require that those
be paid for *-vtth funda raised T=
sources and  to ensure that cha
government does not subsidiza such
lobbying activities with appropriated
funda. In addition, this revision leeks.
for tat sake of auditors and auditees
both, to clarify definition* and thereby
to make) tht current provisiorj against
oat of funds  for lobbying purposes both
easier to comply with and to aruorce.
  Ia recant yttftt Ccneresa and the
Comptroilar  Central have recognized
that tht use af Federal monies by
gnatttt and contractor! to  engage in
                                                    . -  14. -

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                      Federal  Register / Vol. 49. No. 83  /  Friday.' April 27. 1984  /  Notices
                                                                       18263
 lobbying Is inappropriate. The
 voluminous comments OMB received on
 the revision demonstrate that there is
 little disagreement on this score. Use of
 appropriated funds for lobbying diverts
 scarce resources (torn the purpose for*
 which the grant or contract was
 awarded. By  permitting such a use of its
 funds, the government subsidizes the
 lobbying efforts of its contractors aad
 grantees. This improperly distorts the
 political process, by favoring the
 political expression of lorne—
 organizations with contracts or grants-
 relative to others, who must conduct
 their political expression at their own
 expense.
  Government subsidization of certain
 participants the debate over legislative
 outcomes may contradict important
 principles of government neutrality in
 poiiticai debate, and use of Federal
 funds for private lobbying can give the
 appearance of Federal support of one
 political position over another. As the
 comments indicate, subsidizing such
 lobbying can  create misunderstanding
 and interfere  with the neutral.
 aonpartisan administration of Federally-
 funded programs. The revision seeks to
 avoid the appearance that, by awarding
 Federal grants, contracts, or other
 agreements to organize dons engaged in
 political advocacy  on particular sides of
 public issues, the government has
 endorsed, fostered, or "prescribe(d] [at]
 orthodox" a particular view on-such
 issues. West  Virginia State Board of
 Education v. Banteas. 319 U.S. 924. MS
 (1943).
  Requiring grantees and contractors to
 bear the costs of their own lobbying
 efforts does not infringe upon their
 constitutional rights. No person or group
 has a' First Amendment right to receive
 government funding for political
 expression. As the  Supreme Court has
 recently emphasized in a unanimous
 opinion, free speech does not mean
 subsidized speech. The Federal
 government "is not required by the First
 Amendment to subsidize lobbying. * * *
 We again reject the 'notion mat the First
 Amendment rights  are somehow not
 fuily realized  unless they are subsidized
 by the State."' Rfgaa v. Taxation with
Resnseatatson of Washington. 103 S.Ct
 1997. 2001 (1983).
  In recent years, the problem of the use
of taxpayer funds for  lobbying purposes
has become of increasing concern, and
steps have been taken in a variety of
different contexts to address the
problem. There has been increasing
public concern that limited grant and
contract resources should not be used in
projects that involve political
organizing.
   Congress has responded to this
 problem by adopting numerous
 appropriations restrictions to address
 some of the more flagrant abuses and
 problems raised by lobbying activities
 with Federal funds. Indeed, over die
 past ten years, some 40-30 riders have
 been attached to appropriations bills to
 address different aspects of the problem.
 These appropriations riders use many
 different formulations, but have as a
 common element prohibiting the  use of
 appropriated funds for publicity or
 propaganda purposes designed to
 support or defeat legislation. The
 agencies affected by specific
 appropriations riders include Defense.
 the District of Columbia, the Legal
 Services Corporation, and agencies
'covered by the State-Justice-Commerce
 Appropriations Acts. For example, the
 current Labcr-HHS-Education-Reiated
 Agencies Appropriations Act. dealing
 with agencies that dispense the large
 proportion of grant funds, reads as
 follows:
  No part of any appropriation contained in
 this Act thall be used to pay the salary or
 expenses of any grant or contract recipient or
 agency acting for inch recipient to engage in
 any activity designed te influence lepaiafloa
 or appropriations pending before the
 Congress. (Section JOB. Pub. L 96-139.)
  This provision has been construed by
 the Justice Department to extend the
 ban on grantee activities significantly
 beyond the conduct of "grassroots"
 campaigns. Moreover, as to many of the
 appropriations riders which prohibit
 agencies from using public funds for
 their own lobying activities, dear
 policies regarding grantee and'
 contractor expenditures for lobbying
 may be needed in order for the agencies
 not to be in violation, albeit indirect, of
 their statutory restrictions. Enforcement
 of these appropriations provisions, and
 of the consensus principle that Federal
 funds should not be used to support
 lobbying activities, has proved to be
 very difficult because of the absence of
 any  dear definitions or standards for
 determining which activities by grantees
 and  contractors violate the lobbying
 restrictions.
  Furthermore, when audits are
 undertaken, the lack of dear standards
 imposes substantial burdens on the
 grantees. Auditors can have great
 discretion and significant leverage over
 the grantees in negotiations to determine
 which factors should be induded in
 allowable costs. If auditors decide to
 inquire into lobbying activities.
 nonprofit entities can be compelled to
 provide elaborate factual backup from
 their records to refute any cleims that
 may bo raised. In light of the enormous
 expansion of Inspector General staffs
 and the sensitiviry of this issue.
 significantly more auditing activity can
 reasonably be expected in this area in
 the future. Accordingly, the current
 practices do not serve the current need
 to assure that Federal funds are not
 used for lobbying purposes and. as well.
 impose potentially heavy burdens on
 agencies, their auditors and the
 nonprofit entities themselves.
   As the Investigations Subccmmittee sf
 the House Armed Services Committee
 recently concluded:
'   (T]here it a deficiency in die
 appropriations acts prohibition of lobbying
 with appropriated fuadi. A review at the
 legislative history of the publiciry-
 propaganda appropriation* acts resmcaon*
 provides no definition of the critical iermi
 •publicity' and •propaganda.' Thus, there
 appears to be so Srm diaoncnon oerwecn u-e
 conduct which it permissible and that whiea
 is prohibited. Thus the clear signal from
 Congress through the appropriations iawt
 and other actions aae not been translated
 into effective management contrail.

   In the commercial field, several steps
 recently have been taken to facilitate
 the need to be sure that Federal funds
 are not used for lobbying. For example:
   • On December 18,1981. the
 Department of Defense issued revisions
 to its Defense Acquisition Regulation
 (CAR), addressing for the first time the
 issue of lobbying activities, and making
 certain such costs unallowable under
 Defense contracts.
   • On April 27.1982 and October 22.
 1982. Defense further toughened its rules
 disallowing lobbying costs by
 ^)
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18264
Federal  Register / Vol. 49. Mo. 83  / Friday. April 27. 1964  /  Notices
the fonaar F?R lobbying cost pnnciple.
The Defense Acquisition Regulation
Council, however, issued a deviation so
that tlie former OAR lobbying cost
pnnuple continues^ be operative for
Defense contractors.
  These initiatives, however, affect only
defense and civilian contracts with
commercial entities. No generally
applicable cost principle has been
issued to cover the Federal Funding of
lobbying under contracts and grants to
nonprofit organizations. These entities.
however, are in the same position with
respect to most Federal government cost
guidelines as profit-making grantees and
contractors, and the comments received
by OMB clearly and overwhelmingly
support the view that the same lobbying
cost principles should likewise appiy to
them. Therefore, in keeping with sound
management practices, it is important
that tie lobbying cost principles  be
extended to these nonprofit entities and
harmonized to the maximum extent
practicable, with the principles already
applicable to commercial concerns.
  Given the vagueness of the existing
A-12Z standards, the need for a clear
cost principle on lobbying for nonprofit
grantees was addressed explicitly by the
Comptroller General in September 1982.
after a GAO investigation of whether
funds under Title X of the Public Health
Services Act ware used to finance
lobbying activities or abortion-related
activities:
  Clear Ftdtnl guidance t* needed both to
«tuur» that Title X ptegrast funds an not
used for lobbying tad to preclude
•janecMury controversy over whether
jrmntee* ue vioUoag Federal restrictions.
TJt* .•now to nv>*9 and stoke mon specific
die cott pnnvp/is applicant to oil fedtrttJ
fiancee* it iha uppropnatt auchoiuun to  '
«A;»ve -Jim mat. GAO/HRD-SZ-106 (Sept
24. 1982) it 27 (empbtiu idded).
  This revision thus addresses the major
area in which federal coat principles
have sot yet been adopted to ensure
that appropriated fund* are not used to
subsidize lobbying by Federal grantees
and contractors. This revision is
intended to provide lines of demarcation
to that nonprofit entities can know in
advance what is allowable. The revision
protects their Tint Amendment rights
and in significant respects strongly
advances their interests. By giving
nonprofit entities dear guidance and
limiting the bookkeeping work that can
be required to refute an auditor's claim
of unallowable costs, the revision
removes a potentially severe burden
from these entities, especially the
smaller and less well financed groups. In
addition, although the revision cannot
resolve in advance every problem which
may arise in this complex field, a
                  mechanism has been provided by which
                  nonprofit! may obtain advance rulings
                  whether certain costs are unallowable.
                    The revision is similar in critical
                  respects to the current Defense and FAR
                  procurement regulations, although—as
                  noted elsewhere in this premble—
                  provisions added in the past two yean
                  to the cost principles governing all
                  Federal contractors are far more
                  restrictive than the revision adoped
                  here. Since parallel revisions are being
                  issued for Circular A-122 and FAR sets
                  of cost principles, the present initiative
                  guarantees uniformity of lobbying cost
                  rules for both nonprofit and profit-
                  making recipients of Federal funds. This
                  principle of uniformity has been urged
                  by Congressional commenters and by
                  the GAO.

                  VL Principal Objections to the Proposal
                  A. Legal Authority
                    Numerous  commenters suggested that
                  OMB lacks authority to issue this
                  revision to Circular A-122. Most of these
                  comments appear to have been based
                  upon a report of the Congressional
                  Research Service, which suggested that
                  this might be a potential legal issue but
                  ultimately reached no conclusion on the
                  matter. OMB. supported by the
                  Comptroller General, believes  that its
                  legal authority to issue the amendment
                  is clear.
                    The responsibility for implementing
                  grant programs, including the power of
                  administration, has been delegated by
                  Congress to the various grant-  and
                  contract-making agencies. It has long
                  been settled that the Federal
                  government may impose terms and
                  conditions upon grants and contracts it
                  awards, including those given to State or
                  local government instrumentalities. 5«e.
                  e.g.. King v. Smith, 392 U.S. 309 (1966).
                  Accordingly, those agencies have  the
                  direct legal authority to establish cost
                  principles and. prior to the late 1970s.
                  did so in a piecemeal fashion without
                  coordinated government-wide
                  standards.
                    OMB's legal authority for establishing
                  cost principles derives from the
                  President's constitutional authority to
                  "take care that the laws be faithfully
                  executed." LT.S. Constitution. Article II.
                  Section 3: his authority under section
                  205(a) of the Federal Property and
                  Administrative Services Act 40 U.S.C
                  488(a): and from the general supervisory
                  responsibilities over the Executive
                  Branch vested by Congress in the
                  President and in OMB. In particular, in
                  its capacity as the President's managing
                  agent  for the Executive Branch. OMB is
                  authorized by 31 U.S.C 1111(2) to assist
                  the President in improving economy  and
efficiency .throughout the government by
developing plans for the improved
organization, coordination, and
management of the Executive Branch.
This revision constitutes an effort to
develop government-wide cost
principles that are uniform, to the
maximum extent practicable, and treat
similarly situated organizations alike.
  The President assigned responsibility
for grants management *o OMB by
Executive Order No. 11541 jjuiy t. 1970J.
pursuant to Reorganization Plan No. I of
1970. 3 U.S.C. App. Subsequently, grants
management authority was transferred
to GSA by Executive Order No. 11717
[May 9.1973) and transferred back to
OMB by Executive Order No. 11393
(December 31.1975). Relevant statutory
authorities include section 209 of the
Budget and Accounting Act of 1921.31
U.S.C. 1111(1): and section 104 of the
Budget and Accounting Procedures Act
of 1950. 31 U.S.C 1111(2). Under these
and other general management
authorities. OMB may develop plans for
implementing better management with
"a view to efficient and economical
service" and may issue supplementary
interpretative guidelines "to promote
consistent and efficient use of
procurement contracts, grant
agreements,  and cooperative
agreements."
  In its capacity of exercising the
President's general management
functions over the Executive Branch.
OMB has the power to supervise and
direct the management activities of
Federal agencies. OMB has issued a
series of Circulars over the years in
discharging these delegated
responsibilities, and these Circulars
serve as one of the primary means of
informing the agencies how to exercise
their authority in administrative.and
managerial matters. The cost principles
set forth in Circular A-122 exemplify  .
OMB's traditional budget and
management policy authority.
  OMB Circulars are binding upon the
Executive agencies as a matter of
Presidential  policy. Agencies, in mm.
incorporate the previsions and
requirements of applicable OMB
Circulars into grant and contract
agreements through regulations, grant or
contract terms, or other means. In :his
manner, the  Circular provisions become
legally binding upon contractors and
grantees. Indeed, provisions of OMB
Circulars have been held legally
applicable to grantees even when the
grant-making agency has not explicitly
implemented the Circular. Qonaar
Corporation v. Metropolitan Atlanta  -
Rapid  Trenail Authority. 441 F. Supp.
1108.1172 {N.O. Ga. 1977J.
                                                        16

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                      Federal Register / Vol. 49. No.  83 / Fnday. April 27. ;984 /  Notices
                                                                      18265
   This revision, tike the coat principles
 disallowing advertising, fundraising.
 entertainment and investment
 management costs, is directly related to
 (he efficient and economical  ~
 administration of grants, contracts, and  .
 other agreements. By prohibiting the use
 of grant and contract monies for
 lobbying (unless specifically authorized
 by statute), funds can be directed
 toward their proper uses, thereby
 achieving greater public benefit As the
 Comptroller General has noted. "The
 cost principles applicable to all Federal
 grantees is she appropriate mechanism
 to achieve these ends [of ensuring that
 Df ograffi Funds are not used for
 lobbying]." GAO/HRD-U-IM
 (September 24.1982). at 27.
   As noted, the Comptroller General
 believes that OMB has the dear legal  ..
 authority to issue the Circular
 amendment published today, and
 supports it

 8. First Amendment Considerations
   Some coounenten suggested that the
 revision might under certain
•.circumstances, be construed as imposing
 unconstitutional burdens on First
 Amendment freedoms of speech.
 association, and the right to petition
 Congress. Most of these objections
 appear to follow, in large measure, an
 analysis of the proposed revision
 prepared by the Congressional Research
 Service (CRS) which, as indicated, noted
 that constitutional questions might be  •
 raised but ultimately did not conclude
 that the proposal was unconstitutional
 in any respect Constitutional objections
 to the revised November proposal were
 sharply reduced, apparently in response
 to the May 1983 decision of the Supreme
 Court in Regan v. Taxation With
 Representation of  Washington. 103 S.
 Ct. 1997. That case reemphasized that
 nonprofit entities do not have a First
 Amendment right to have their political
 advocacy activities subsidized by the
 Federal government and essentially
 satisfies the principal constitutional
 concerns raised during the comment
 period. OMB. however, has carefully
 reviewed the comments and. where
 improvements in phrasing could b«
-made to eliminate ambiguity or provide
 cianty, appropriate changes have been
 made.
   latent Underlying the Circular. Some
 commenters suggested that the revision
 was the product of an unconstitutional"
 discriminatory purpose, an alleged
 intent to "defund the left" Assuming.
 arguendo. that the allegation is relevant
 as a matter of law in overriding the
 actual effect of the revision, this concent
 is without foundation. As more fully.
 explained in the November 1983 notice.
 the intent behind the revision is
 nondiscrimioatory, and its effects are
 politically neutral It it designed, as a
 matter of sound management practice,
 to extend to nonprofit grantees and
 contractors a cost reimbursement policy
 already applicable to similarly situated
 profit-making entitles. The revision is
 intended only to ensure that Federal
 funds are not used to subsidize lobbying
 efforts. The revision is content neutral
 and is not intended "to discourage or in
 any way penalize organizations for
 lobbying efforts conducted with their
 own funds." 48 FR at 30880.
 Furthermore, nothing in these neutral
 accounting principles provides any basis
 for concern chat they will be applied in
 anything but an impartial objective
 fashion. Accordingly, the revision
 passes constitutional muster. Regan v.
 Taxation With Representation of
 Washington. 103 S. CL 1997, 2002-2003.
  Qverbnadth.  Some commenters
 claimed that tho revision violates the
 First Amendment because its provisions
 an overbroad and not drafted
 "precisely" and "narrowly" enough. For
 example, the League of Women Voters
 expressed concern that the language of
 the revision somehow might require
 "disclosures concerning the source of
 funds for private lobbying and certain
 other political activities." in violation of
 its freedom of association and right of
 privacy.                 •          • •
  Upon review of (ha comments, OMB
 believes that the "overbreadth" claims
 an defective. This is particularly so in
 light of the elimination of the so-called
 "tainting" theory, under which Federal
 reimbursement would have bean
 disallowed for the entire cost of any
 supplies, equipment, or services of a
 nonprofit organization used even
 partially for lobbying or advocacy
 activities. The November proposal  and
 this final version have dropped the
"tainting" approach in favor of a much
men narrowly crafted "allocation"
 approach, in which only the actual
 amounts expended an deemed
 unalloweble—on amendment that man
 than satisfies all overbnadth concerns.
Moreover, this allegation applies with
greater force to the current vague bar in
the Circular and to the statutory ban
earlier noted.
  Vagueness. Other commanters
suggested that the proposed revision
was impenaissibly vague. For example.
the National Education Association
contended that "the revised proposal is
so ambiguous and vague that
organizations would not know how to
comply with them and OMB could
interpret them arbitrarily and apply  --
them unequally," and the American
 Friends Service Committee alleged that
 "{tjhis (proposal) will tend to chill
 advocacy efforts of organizations for
 fear of jeopardizing Federal grants and .
 contracts." Some commenters. including
 the League of Women Voters, also
 claimed that the proposal leaves
 nonprofits with no better guidance on
 unallowable costs than before.
  Upon review of the comments. OMB
 finds mesa claims wholly unpersuastve.
 As noted above, the management
 consideration driving this revision is the
 desire to provide a clear, uniform
 definition of unallowable activities, 10
 that grantees and contractors will know
 what is expected of them and can
 conform their conduct to the guidelines.
 and so that agencies and auditors will
 have more explicit standards to which
 to refer than are now available. The
 suggestions about vagueness are wholly
 speculative and without any real basis.
 However, in order to avoid any poeiibte
 ambiguity and provide explicit guidance
 to nonprofit entities, the final revision
 has been revised in several respects.
 and a seetiou-by-section explanation of
 the operation of the revision provided.
 In particular, as described in detail
 below, the proposed definitional phrase
 "lobbying and related activities" has
 been changed to "lobbying." and the
 standard "costs associated with" term
 has been used to clarify application of
 subpangraphs a and b. Finally, section
 (c)(5) of the proposal provides for
 advance clarification procedures
 between agencies and grantees, which
 should further assist in the development
 of a fair evolutionary process of
 implementing the final revision and its
 objective of limiting Federal
 subsidization of lobbying.
  RecordJteeping. Finally, some
 commenters suggested that the
 revision's reporting and recordkeeping
 requirements somehow would burden or
 <7hifl >i«» First Amendment rights of
 nonprofit entities. These recordkeeping
requirements comply fully, however.
with the Supreme Court's decision in
Regan. *e* 103 S. CL at- 2000 n.6. and are
 consistent with accepted accounting
 principles. In fact they constitute one 31
 the major factors which eliminates any
 alleged potential for "unfettered  .
 administrative discretion" about which ,
 other commenters, notably CRS.
 objected These requirements have been
 intentionally made less onerous and far
 more explici; than those provided by
OMB management circulars in other
 circumstances for other types of costs.
See the current Circular A-122. and
Circular A-llfc "Uniform
Administrative Requirements" for
 nonprofit organizations, and compare
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Fadaral  Register /  Vol. 49.  No. 83  /  Friday. April 27.  1964 / Notices
 with i«ction c(4) of the revision. AJ
 acted above, oae of OMB's ptiauy
 goals b«i been to reduce the burden on
 nonprofit entities during the audit
 protest and :o reduce the amount of
 bookkeeping maternal auditors may
 demand In challenging the allowability
 of '.heir lobbying costs.
   The revision simply requires nonprofit
 entities to 'maintain adequate records
 to demonstrate that the determination of
 cost] as being allowable or unallowable
 pursuant to paragraph B21 complies
 with ±t requirements of this Circular."
 The paragraph does not cadi for separate
 ^establishment of the lobbying and non-
 lobbying activities of an enaty.  Indeed.
 in the case of indirect-cost employees .
 who spend 25% or less of their tune
 engaging in lobbying, there is no
 requirement thtt they maintain  time
 logs, calendars, or suailar records.  The
 grantee or contractor, in such instances.
 exercises full discretion over its
 recordkeeping activities.
   la sum, the recordkeeping
 requirements are lawful reasonable,
 and by ao means burdensome relative to
 other unallowable cost activities.
 C Relationship With Intend Revenue.
 Code Proviaioae
   Some conuaenters suggested that the
 Circular A-122 revision wee not
 necessary because the internal Revenue
 Code's restrictions regarding
 "influencing legislation" by 501{c)(3)
 organizations already provide sufficient
 protection against lobbying abuse.
 Others claimed that the revision could
 create  confusion  or. needlessly increase
 the paperwork burden on grantees  and
 contractors already regulated by the
 Code provisions. Neither of these
 arguments is valid.
   The lobbying restrictions of the
 Internal Revenue Code and Circular A-
• 122 serve entirely different functions.
 The Cade has no direct bearing on
 preventing the use of grantee funds for
 lobbying purposes, because it governs
 only the use of private funds and does
 not concern the use of Federal monies.
 The sole purpose of the Code previsions
 Is to define the character and status of
 organizations that will be entitled to
 favorable tax treatment As long as
 lobbying expenditures do not exceed a
 certain portion of its revenues, an
 organization is eligible for tax-exempt
 status under the Code (assuming it  also
 meets the qualifying tests in other
 areas}. The Code's lobbying provisions
 determine only whether an organization
 is sufficiently devoted to a public
 purpose to justify preferential tax
 treatment
   The Code doee not address the
 distinct question of whether Federal
                  grant monies should be used to
                  reimburse lobbying costs—the sole
                  problem addressed by the Circular A-
                  122 cost standards. The Code's lobbying
                  previsions thus do not preempt or
                  otherwise make unnecessary the
                  promulgation of cast standards in this
                  area. Indeed, the. fact that the Code's
                  lobbying provisions do not address the
                  use of grant monies for lobbying has
                  been implicitly recognized by Congress
                  on numerous occasions through
                  appropriation bill ntiers prohibiting such
                  expenditures. See. e.g.. Pub. L 97-377.
                  section 509;  Pub. L 96-74. section 607.
                  : .The fact that certain expenditures by
                  nonprofit organizations are lawful under
                  the Code does not mean that Federal
                  grant monies should be spent for those
                  purposes. For example, the Code does
                  not prohibit  tax-exempt organizations
                  from spending their revenues on
                  advertising or entertainment Circular
                  A-122, however, allows only certain
                  advertising costs,  and disallows all
                  entertainment costs, from
                  reimbursement from Federal awards.
                  Moreover, the Code does not preclude
                  additional conditions from being
                  imposed on  tax-exempt organizations.
                  For example. Section 503 of the Code
                  denies tax-exempt status in certain
                  instances to organizations using their
                  revenues for the private gain of
                  controlling individuals. That prevision
                  does not prevent disallowance of the
                  use of Federal grant monies for the
                  advancement of private partisan or
                  financial interests. This point is perhaps
                  beet highlighted by the fact that nothing
                  in the Code would prevent some
                  grantees from spending ail of their grant
                  funds for lobbying purposes.
                   Similarly,  the fact that the Code and
                  other previsions of law regulate
                  lobbying activities of business firms
                  (e.g.. 28 US.C 162(e): Federal Election
                  Campaign Act 2 U.3.C 431-430) does
                  not mean that there should be no
                  provisions in the FAR regarding such
                  activities. Some members of the
                  business community suggested that any
                  previsions in Circular A-122 regarding
                  the unaUowability of lobbying
                  expenditures should be superseded by
                  definitions of lobbying set forth in the
                  Federal Regulation of Lobbying Act 2
                  U.S.C 281-270. The commenters have
                  cited no authority, however, to support
                  the view that the Code, lobbyist
                  registration  laws,  or any other statutes
                  obviate the propriety of the
                  government's assuring that Federal
                  grant and contract funds are spent only
                  for authorized purposes and. to the
                  degree feasible, that they be used to
                  provide direct goods and services to
                  intended beneficiaries.
   Although the Code and Circular A-122
' lobbying provisions serve different.
 purposes, in practice the information-
 and accounting practices necessary to
 satisfy these two authorities largely
 overlap so that it will generally be
 possible for both provisions to operate
 harmoniously. The Code provides a set
 of operational principles with which -
 nonprofit organizations are already
 familiar. Thus, wherever possible, the
 final revision brings Circular A-122 into
 greater conformity with those sections
 of the Code dealing with aonprofn
 entities. Where differences .remain.
 Circular A-122 is generally  narrower in
 its application man the Code—end often
 far narrower. Thus, nonprofit entities
 should be able to adhere to the lobbying
 cost standard using existing accounting
 and bookkeeping systems.
   While some commenters argued that
 Circular A-122 is revised would require
 all aonprofits to maintain multiple jets
 of books, no commcnter was able to
 specify why simultaneous compliance
 with the Code and A-122 required such
 double recordkeeping. As discussed in
 the section concerning  Paperwork
 Reduction Act considerations,  a
 nonprofit organization maintaining
 adequate financial records should be
 able to comply fully with information
 requests from the Internal Revenue
 Service or its granting Federal agency.
 Further, section c(4) of  the revision
 effectively exempts almost all
 employees (thoee that spend less than
 25% of their time on unallowable.
 lobbying activities) from any
 requirements to keep time logs.
 calendars, or similar records relating to
 indirect cost time.

 0. Restricting the) Flow of Information

   Many of the critical nonprofit
 commenters asserted that it is crucial
 for them to be allowed  to "educate"
 policymakers on pending legislation.
 and vat the revtaion will impede their
 testimony and other assistance to
 legislators, by restricting the use of
 Federal grant and contract funds for
 lobbying activities. The National
 Education Association, for example.
 alleged that "the proposed revisions
 would have an adverse effect an the
 government and on nonprofit
 organizations through discouraging
 communication with Congress and
 disallowing activities that are vitally-
 important to nonprofit organizations."
 Most iuch commenters seemed to
 premise their comments on the ground
 that the proposal would prevent them
 from even attending legislative hearings
 or analyzing legislation. Others claimed
 that should Federal funds not be

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                      Fadaral Register / Vol.  49. No. 63 / Friday.  April 27.  1984 / Notices
                                                                      1826?
available, there would be no other
manner ia which legislator* could
receive thtir valuable information.
  OMB has repeatedlystated that the
only effect of thtmisioa i» intended to
prevent Fsdtrai funds being expended
for lobbying purposes, and (hat nothinf
in the revision liniu tht ability of
nonprofit entities to lobby with thtir
own funds. OMB hai made every effort
to clarify tht terms of the  rtviaioa so a*
to eliminate such misconceptions about
the scope of what it unallowable.
Heoce. various language changes have
been made in tht revision, especially in
section* *(3) and b(l). ft was never
intended, for example, that funding for
all attendant* at legislative hearings
would be prescribed, but only that that  •
funding for attendance connected with
or in knowing preparation for a lobbying
effort would be precluded. The final
version removes uy doubt on this
score.
  The revision will not restrict the
legitimate flow of factual information
requested by the legislators, woo an in •
the beet position to know what they
need to discharge their functions in our
system of government Even in the)
context of contractor and  grantee
lobbying, section b(l) ha*  been designed
to avoid such interference with formal
congressional hearing and normal
informational interchange processes.
E. Evidence of Confusion Regarding
Current Lobbying Restrictions          /
  Several commenters argued that too
few instances of the use of Federal
funds for lobbying activities had been
cited to justify the revision. However, a*
noted in the November proposal the .
number of adjudicated violations was
limited by enforcement difficulties, not
necessarily an absence of abuses.
Before the revision, it has  been very
difficult for auditors to obtain evidence
of outright violation* or fraud that could
be prosecuted, or of mistake* in
application, so they could be corrected.
Such items were typically carried on the
book* as part of an organization's
indirect costs, and not broken out by
category.
  While various statutes mandate that
taxpayer funds not be used for lobbying
on legislation and electioneering, and
while there is clear policy consensus .
that no Federal funds should be spent
for these purposes;  the Inspectors
General have reported that effective
auditing of the use of Federal funds for
lobbying is not possible under the
existing Circular. For example, Charles
Dempeey. HUD's Inspector General and
Chairman of the Prevention Committee
of the President's Council  on Integrity
and Efficiency, ha*  stated that:
  W* do not believe that iffecttve tudlttaf of
the use of Federal fund* for lobbying
purposes is possible under the current OMB
Circular A-121 Moreover, we do not beiiavs
that, gtviti the ourent Circular, it is possible
to know or otherwise sssess the extent to
which Ptderal Funds are used for lobbyist
purposes.

  However, even with the current
auditing difficulties, a number of
instances have been uncovered in which
there is. at a »"»"»««^ confusion on the
part of agencies and grantees as to
allowable and unallowable costs in the
area of lobbying. Examples include:
  • A Department of Education grantee
under the Women'* Educational Equity
Act Program recently conducted a two-
day conference in Washington, D.C
According to the conference program.
one afternoon was largely devoted to a
discussion of "political action  and
participation." The other afternoon was
devoted in its entirety to "a visit to
Capitol Hill and meeting with
legislators." The program itself noted.
that the conference had been funded by
the Department of Education. .
  • A September 1982 GAO study of
grantees under Title X of the Public
Health Service Act audited
representative grantees, and found that
some incurred "expenses that, in our
opinion, raised questions as to
adherence with Federal lobbying
restrictions." GAO/HRD-82-lOft.   .
  • GAO found that e mass
transportation grantee prepared and
distribured a newsletter, a portion of
which urged its reader* to write to the
Congress to support continued funding.
of a "People Mover Project" Tht agency
was doeatfd rvsponaibia for not
informing its grantees that expenditures
of gnnt funds for this purpose were not
permissible. (I>-202 973. November J.
1981.).
  As noted, the GAO ia September 1982.
recommended a coat circular revision on
lobbying. And, aa further noted, the
current rvvsson has been prepared in
active consultation with the GAO.
which supports it The revision will now
make it possible for the Federal
government to better ensure that
appropriated monies reach their proper
objective, while limiting the amount of
documentation auditors may demand
from nonprofit entities in auditing and
negotiating situations. Similarly, for the
first  time, organizations will have
clarified responsibilities and incentives
for proper documentation, which will
benefit both the private sector and the
government.
 F. The) Proposed Revision Wes Not
 Sufficiently Restrictive

   Many commenters argued thai the
 proposed revision was not sufficiently
 restrictive to curb ebuses in this ares.
 For example, the American Legislative
 Exchange Council, the largest individual
 membership organization of state
 legislators, argued that the revised
 proposal would not achieve the
 necessary fundamental reforms. "There
 is a tremendous concern across the
 country that some groups are using
 Federal dollar* to advance their own
 narrow political interests before
 Congress and State legislatures *  * *
 we believe these regulations should be
 stronger in requiring a strict accounting
 of Federal grant money."
   Similarly. Taxpayers for Less
 Government recommended broadening
 the definition of unaiioweble lobbying '.o
 include the lobbying of several types of
 government entities not covered under
 the November proposal, such as school
 boards and independent regulatory
 commissions. It also recommended that
 all forms of legislation be explicitly
.covered, including bills, appropriations.
 declarations, ratifications and calls for
 conventions. It also contended that
 "fcjourt cases on any of these areas
 should also be prohibited with the use of
 tax funds: if a group has a legal dispute.
 the taxpayer should not have to
 underwrite the extensive litigation
 process."
   The Stockholder Sovereignty Society
 advocated several changes  to tighten the
 revision: (1) Assess doable or treble
 damages against violators: (2) debar
 violators from participating for five
 yean in the particular program from
 which funds were diverted for lobbying
 or related activities: and (3) debar any
 parent subsidiary, or  other controlled
 organization of violators.
   Many other commenters opposed the
 omission of local level lobbying from the
 revision, contending that  there is.no  '
 rational basis for funding one level of
 lobbying (local) when another (Federal]
 is made unallowable.  Many also  argued
 that the revised Circular should reflect
 the principle of "preemption." For
 example, the United States  Business and
 Industrial Council stated  "(nonprofit
 organizations should be required to
 choose between political  activism and
 Federal subsidies. Preemption would
 allow nonprofit* to lobby, but only on
 condition that they disavow Federal
 funds." Such an approach would  be far
 more restrictive than OMB's January
 1983 proposal
   Braddock Publications  argued that
 with adoption of the allocation method.
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18268
Federal  Register / Vol. 49. No. 83 /  Friday. April 27, 1964  / Notices
the 25% reeordkeeping rule created an
unfortunate loophole. "A '10% rule'
would bi more reasonable and would
i till address the concerns of tfiose
groups which iobby very little."
  OMB has carefully considered but not
accepted these suggestions. In OMB's
judgment, the November 1983 revision.
as modified in this final publication.
constitutes a major, workable
management initiative which represents
the best achievable compromise among
the interested parties, while fully
protecting their interests. OMB also
considered and rejected more extensive
"sunshine" provisions which would
have called for full disclosure by
recipient organizations of detailed
information concerning their personnel
public policy positions, affiliations of
officers and directors, publications, and
other such information. OMB believes
such reporting requirements .would
exceed those necessary to achieve the
purpose of this revision to ensure that
Federally appropriated funds are not
used for lobbying activities by grantees
and contractors.

vn. Analysis of Comments and
Resulting Change* to Proposal
  The revision creates a new paragraph
in Attachment 8 to Circular A-122. to be
called "821 Lobbying." Paragraph 821
consists of three subparagraphs, which
in tun contain a total of thirteen
lections.

A. Unallowable Lobbying—
Subparagraph a
  enforcement of the current restrictions
on tax-funded lobbying has been
hampered by the lack of a clear
definition of what activities are
unallowable. In constructing the
definitions and standards in this
revision. OMB has drawn where
appropriate upon experience with the
Internal Revenue Code, statutory
provisions. Defense. CSA, and NASA
procurement regulations, and similar
authorities. Great care has ben taken to
avoid prohibiting reimbursement for
activities that are legitimately necessary
;o fulfill the purposes of a grant or
contract  •
  Subparagraph a defines Sve
categories of lobbying activities that are
unallowable for reimbursement It
should he read in conjunction with
subparagraph b. which establishes
exceotions to these provisions.

8. Electioneering— Sections a (I) and
  Section a(l) makes unallowable
certain electioneering activities at the
federal state, or local level*. It applies
both to referenda, initiatives and similar
                  campaigns..as well as to elections of
                  candidatts to office. The restrictions
                  should be familiar to nonprofit
                  organizations, since they are prohibited
                  by 28 U.S.C 50l(c}(3). This section is
                  narrower than the Code in one respect
                  however, because it is confined to
                  "contributions, endorsements, publicity.
                  or similar activity," while the Code
                  broadly prohibits "participating] or
                  intervening], directly or
                  indirectly' • '."
                    Section a(2] makes unallowable Che
                  financial or administrative support of
                  political entities—including political
                  parties, campaigns, political action
                  committees, or other organizations—for
                  the purpose of influencing elections.
                  Thus, it bars indirect support of
                  electioneering activities through
                  intermediaries. This section also follows
                  the definition of disqualifying activities
                 • under the Internal Revenue Code.
                    Very few commenters disagreed with
                  the principle that use of Federal funds
                  for electioneering and political activities
                  should be disallowed. Some, however.
                  argued against the "disallowance of   •
                  costs associated with participation in
                  referenda, initiatives, and similar
                  procedures." For instance, the Catholic
                  Social Service of Santa Clara asserted
                  that lobbying expenditures should be
                  allowable if incurred for an educational
                  purpose. OMB agree* that the cost of
                  educational activities should be
                  allowable if they are educational and
                  nothing more. But  if the activities go
                  further than helping persona accumulate
                  data or comprehend its meaning, and
                  involve partisan political activity or
                  steps designed to influence the outcome
                  of an election, they constitute activity
                  that should not receive Federal funding.
                    The American Jewish Congress also
                  argued that section a(l) would severely
                  restrict political campaign involvement
                  by organizations classified under the
                  Internal Revenue Code as Wl(c)(4) ,
                  groups, which face "'"'»"•' restrictions
                  as to their political involvement As
                  acted above, the Code's restrictions
                  serve merely to classify organizations
                  for purposes of taxability. By contrast
                  the cost principles established through
                  Circular A-122—including this
                  revision—define permissable uses of
                  Federal grant or contract money,
                  without regard to the organization's tax
                  status. The revision doe* not in any
                  respect limit an organization's right to
                  engage in campaign activities with its
                  own funds.'
                  C Attempts To Inflame* Legislation—
                  Sections a(3) and a(4)
                    Section a(3) make* unallowable the
                  cost* of attempts to influence Federal or
                  state legislation through contact* with
government officials. This section  -  .
confines the reach of unallowable
lobbying to legislative deciaionmaking.
aad does not apply to Executive Branch
lobbying, with the exception of attempts
to influence a decision to sign or veto
legislation, and attempts to use state
and local officials as conduits for
grantee and contractor lobbying of
Congress or state legislatures. The
coverage of section a(3) is more limited •
than the current prohibitions  in the'
Internal Revenue Code, and the FAR. ;n
that it does not apply to legislative
lobbying at the local level (e.g.. matters
such as obtaining zoning changes, police
protection, or permits). Since there is no
rigorous separation between legislative
and executive authority at the local
level it would be difficult to construe: or
enforce a rule regarding legislative
lobbying at that level
  Efforts to influence state and local
officials to accomplish the lobbying
activities defined in section a(3) are
likewise unallowable. Thus, the Federal
government will not reimburse  an
organization for the cost of meeting with
mayors or city council representatives if
the purpose is to convince them to lobby
the Congress for legislation that the
grantee or contractor favors.
  The comments raised few objections
to the basic soundness of the
proscriptions in section a(3). although
some argued that the broad coverage of
the January 1983 proposal was more
appropriate than the more-limited scope
of the November proposal. The
Conservative Caucus suggested that the
costs of attempts to influence
rulemakings (as well as legislation) and
of local level lobbying should be added
to the list of unallowable activities.
Similarly,  the Fairness Committee
argued that reimbursement should not
be allowed for any Executive Branch
lobbying, and not simply decisions to
sign or veto legislation. After careful
consideration. OMB has decided not to
expand the scope of this section.
Rulemakings frequently have direct
implications for a grantee's technical
performance of its award. Furthermore.
recipient organizations are iikeiy to
require regular contacts with Executive
ofkials in  the ordinary course of
tun'giffg  and performing the terms of
the grant or contract. As stated ibov«.
this is even more certain to be 'Jie case
at the local level The granting or
witholding of Executive consent :o a bill
is as integral part of the legislative
process, however, so that this limitation
on Executive lobbying is appropriate.
  One commenter, the Concho Valley
Canter for Human Development   '
objected that "prohibiting lobbying at
                                                           ,20

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                      Federal  Register /  Vol. 49. No. 33  /  Friday.  April 27.  1984 / Notices
                                                                      18269
 the state level would interfere with
 business that U more appropriately tb«
 purview of the nate legislature." Ample
 ailowanca is made in section b(2) of this
 revision for activities at the state level
 affecting the authority of an entity or the
 costs of performing Federal grants or
 contracts. Likewise, as recognized in
 section b(3). specific grant or contract
 provisions may, pursuant to Federal
 statutory law. make allowable certain
 lobbying with grant or contract funds.
 Apart from these exceptions, it is not the
 business of the Federal Government to
 subsidize lobbying of state legislatures.
   Section a(4) deals with grass roots
 lobbying, and is applicable only to grass
 roots campaigns concerning legislation.
 Similar provisions an found in many
 appropriation* riders and have been
 interpreted and applied by GAO on
 many occasions. The definition of grass
 roots lobbying in section a(4j. however.
 is less inclusive than that of the Internal
 Revenue Code, tt is limited to efforts to
 obtain concerted actions on the put of
 the public and. unlike the Coda, it does
 ot include attempts "to affect the
 opinion* of the general public" if such
 attempts are not intended or designed in
 such fashion as to have Che reasonably
 foreseeable consequence of leading to  .
 concerted action. 28 U.S.C
 4911(d)(l)(A). The narrower reach of this
 section is consistent with GAO's
 interpretation of the prohibitions in
 appropriations riders on the use of funds
 for "publicity or propaganda." Sw. a.g.,
 Comp. Gen. Op. 3-202975 (Nov. 3.1981).
  It was suggested that use of the term
 "legislation pending." in sections a(3)
 and a(4) of the proposal was ambiguous
 and questioned whether that phrase
 applied only to bills formally introduced
 before a deliberative assembly, or
 included legislation in the process of
 development In response to that
 concern, these sections have been
 amended to specify that they apply
 when the activity in question constitutes
 as attempt to influence either "the
 introduction of federal or state
 legislation" or "the enactment or
 modification of any pending Federal or
 state legislation." This language.
 especially when considered in
 conjunction with the phrase "costs
 associated with" which commences
 subparagraph a. should clarify that the  -
 costs of preparing, instigating or urging
 legislation not  yet formally introduced
 are just as unallowable as lobbying with
regard to bills that have already been •
introduced.   ,    N
  Several commenters. including CARE
and the National Association of
 Manufacturers, expressed concern that
costs of an activity not originally *  •
 intended to promote legislative
 advocacy might be disallowed, after the
 fact, if it were later discovered that the
 activity or its proximate effects did in
 fact lead to the development and
 promulgation of legislation. The revision
 addresses this problem. The limitation
 on "costs associated with ' *  ' any
 attempt to influence  ' ' * legislation."
 as used in sections a(3] and a(4).
 includes costs which support or
 facilitate pursuing or developing
 legislation before its formal
 introduction. However, the key phrase
 in the final version of sections  a(3) and
 a(4) is "attempt to." This phrase requires
 intent or conduct with the reasonably
 foreseeable consequence of initiating
 legislative action, or to support or
 facilitate such ongoing action, in order
 for its actions to be categorized as
 "unallowable."
   The language of sections a(3) and a(4)
 has been amended in minor respects so
 that it tracks more closely those
 provisions of the Internal Revenue Code
 which establish the activities that
 constitute "'"fl"«*«"g legislation."
 Section a(3) tracks 28 U.S.C.
 4911(d)(l](B), which prohibits "an
 attempt to influence any [Federal state
 or local] legislation through
 communication with any member or
'employee of a legislative body, or with
 any government official or employee
 who may participate in the formulation
 of the legislation," Similarly, section a(4)
 follows 28 U.S.C Wll(d)(l)(A).  which   '
 defines "^ft"«*»ging legislation" to
 include "any attempt to influence aay
 [Federal, state, or local] legislation
 through any attempt to affect the
 opinions of the general public or aay
 segment thereof." As previously noted.
 sections e{3) and a(4) are  narrower than
 the comparable Code previsions in
 several respects.

 D, Lqulattn Liaison—section afS)
   Section a(9) makes unallowable the
 cost of legislative liaison activities when
 they are in furtherance of unallowable
 activities aa denned in sections e(lH4).
 While a key purpoae of aa
 organization's "legislative liaison"
 activity may be to direct and prepare for
 what has been defined in  this revision
 aa unallowable lobbying, it may also
 serve other functions that this revision
 does not make unallowable. By contrast
 under the current Defense Department
 Supplement to the FAX. ail legislative
 liaison activities are deemed
 unallowable.
   OMB received more technical
 comments on this section  than  any other
 pert of the proposal Some commenters
 argued thai, since the Internal Revenue
 Code does not disallow "legislative ,
  liaison" for purposes of determining
  organizations' tax-«xempt stems, neither
  should Circular A-12Z However, the IRS
  does not exempt legislative liaison
  activities Cram treatment as lobbying—it
  merely does not recognize legislative
  liaison as a separate category of
  lobbying. Legislative liaison activities
  which, in the language of section a(5),
  were "in support of or in knowing
  preparation for an effort to engage in'
  unallowable lobbying" would be
  covered by the IRS bar. In any event.
  however, and as discussed above, the
  revision is concerned not with
  determining the tax status of entities.
  but with the proper use of Federal funds
  by recipient organizations. Use of the
  term "legislative liaison" in section
  a(5p—in its present narrow sense—can
  now not excuse or mask lobbying
  activities by grantees or contractors.
    Many other commenters argued that
  the proposed section a(5) was
  ambiguous. In particular, they objected
  that the compound effect of prohibiting
  "legislative liaison'' contributing to
  support "lobbying and related activity"
  was vague, and that the proposal was
  difficult to construe because it employed
  a double negative—that is. all
  "legislative liaison" costs were
  unallowable unless the activity was
  unrelated to lobbying. The anal version
  of section a(5) has been revised to
•  accommodate these concerns. The new
  language provides that "legislative
  liaison" is unallowable only "when such
  activities are  carried on in support of or
,  in knowing preparation for an effort to
'  engage in unallowable lobbying."
   The  "knowing preparation"
  requirement in the final reviaon should
  avoid unintended retroactivity problems
  by not  permitting auditors to
  automatically disallow legislative
  liaison coats in every instance where
  they are associated with later efforts at
  lobbying. While responsibility for
  establishing the ellowability of costs
  rests, here aa  in all aspects of cost
  reimbursement with-the parties seeking
  it the "knowing preparation" standard   ,
  of section a(S) is a particularly favorable
  one for grantees and contractors. Thus,
  only those legislative liaison activities
  which, from their timing and subject
  matter, can reasonably be inferred to
  have had a clearly forseeeble link with
  later lobbying fall within the "knowing
  preparation" standard of section a(S).
   Finally, it should be noted in
  connection with section a(S) that the
  term "costs associated with." which
  commences subparagraph a. is fully
  applicable. This means that the
  proscription in section a(5) extends not
  only to costs directly  attributable to
                                                        —  21  -

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Federal Register  /  Vol. 49,  No. 33  /  Friday. April 27.  1984 / Notices
perforating • "legislative liaison"
activity, but also to costs that support or
facilitate its performance Likewise, the
technical status of a piece of legislation
(i.e.. whether it is formally introduced.
referred or enrolled} is not dispositive of
the issue whether the costs of
"legislative liaison activities" are
unallowable withia the meaning of
section a(5).
£ Exceptions to Unallowable
Lobbying—Subparagnpfi *
  Subpangraph b contains three
exceptions to activities disallowed
under sufaparagnph a. The
subparagraph does not necessarily make
the costs of these activities allowable;'
ailowability or unallowability of such
coats will be determined by the terms of
the grant, contract or other agreement
involved. Circular A-122 does not
authorize costs or expenditures: it
merely limits the ailowability of costs or
expenditures.
  Some commenters noted that the use
of the term "not unallowable" in the
introductory clause to this subparagraph
iA the November proposal might indicate
a one legal distinction which grassroots
volunteers would be unlikely to
comprehend or which would lead to
needless confusion. For clarity, the
introduction of subparagraph b has
accordingly been modified to provide
that "the following activities are
excepted from the coverage of
subparagraph a." For this reason.
activities which are not defined as
lobbying by subparagraph a, «.£.
informational communications by
organizations' with its members or the
distribution by organizations of
nonpartisan analyses, are aot set forth
as separate sections of lufapangraph b.
To the extent that thoee. or any other
activities, otherwise fall within the
definitional terms of any section of
subpangrapb a. they are deemed
unallowable unless they fail within the
exceptions defined by subparagraph b.
F. Legislative Requests for Technical
and Factual Informatioa—Section bflj
  Section b(l) exempts from
stibparagraph a technical JtH factual
presentations to a legislative audience
on a topic directly related to grant or
contract performance and offered upon
a documented request even though the
presentation would otherwise constitute
unallowable lobbying. Since contacts
with legislative sources are not made
unallowable in the first place unleea
they are for purposes of influencing
legislation, this exception is relevant
only to those legislative-contacts made
unallowable under section a(3). The
exception is meant to fulfill the specific
                  informational needs of legislatures, and
                  members and staffs thereof, and has
                 . been revised extensively to reflect
                  concents expressed in the comments
                  and by members of the interested
                  Congressional committees.
                    The term "technical advice or
                  assistance," used in the November 1963
                  proposal to define the scope of the
                  exception, has been changed to provide
                  that costs of rendering "technical and
                  factual presentation of information"
                  may be excepted. The term "factual"
                  waa added after "technical" to clarify
                  that to be reimbursable, the services
                  rendered in a section b(l) situation must
                  be overridingly informational in purpose
                  and content and not advocatory.
                  However, the fact that an advocatory
                  conclusion is reached does aot in itself
                  make the presentation unallowable. As
                  previously indicated, this exception will
                  avoid separate accountings and
                  disallowances for each kernel of.
                  information provided in a lobbying
                  effort and will restrict the exception to
                  "presentation{aj" which are in fact and
                  which would be dearly seen as
                  "technical and factual" in character. --
                  This change will allow and advocatory
                  conclusion to be communicated with no  •
                  disallowance for the time and effort
                  involved in preparing or
                  the conclusion, provided of course that it
                  cleariy *""^ naturally flows from the
                  technical *"^ factual date presented.
                  and is a distinctly minor aspect of the
                  overall presentation. In addition, the
                  lobbying effort excepted by section b(l)
                  is confined to information on a topic
                  directly related to the performance of a
                  grant contract or other agreement
                    A requirement that the presentation of
                  such information is to be provided
                  through "hearing testimony, statements
                  or letters"  also has been sdded to the
                  scope provision, in response to a
                  Congressional suggestion. This change
                  helps clarify that with the exception of
                  travel meals and lodging coats in
                  connection with a(3) lobbying, such
                  Information need not necessarily be
                  tendered in formal testimony to fell
                  withia this exception.
                    Discussions with Congressional staffs
                  revealed concerns that legislators'
                  routine business of information
                 • gathering in connection with hearings.
                  drafting bills and other legislative
                  functions might be hampered if the types
                  of requests sufficient to invoke the/
                  section b(l) exception did not include
                  oral requests, especially by telephone.
                  Accordingly, the condition that the
                  request be "written" has been changed
                  to a requirement that it be
                  "documented," The final version of
                  section b(l) de-emphasizes the necessity
for stringent request documentation
requirements. The section also now
states explicitly that the technical
information exception is invoked by
notices in the Caagnssional Record
requesting testimony or statements for
the record at regularly scheduled
hearings. Some persons suggested that
some of the routine information*
gathering functions of the legislative
bodies might be disrupted if such
notices and responses to them were act
specifically included in section b(l). As
indicated below, for its costs (o be
excepted. the presentation must not only
be of a "technical and factual" nature.
but must also be "readily obtainable
and can be readily put in deliverable
form."
  Several commenters expressed
uncertainty about the requirement that.
to fall within the exception, technical
advice or assistance to legislative
bodies must be "in response to a
specific' '  ' request" The term
"specific" has therefore been deleted
from this final version of section b(l).
This change does not affect the
underlying intent that requests sufficient
to invoke this exception must be bona
fide, may not be open-ended or
indeterminate, and must not be made for
the purpose of circumventing the
subparagraph a restrictions.
  Section b(l) now requires that the
request for information be "made by the
recipient member, legislative body or
subdivision, or e cognizant staff member
thereof This language, articulating a
condition implicit in the November 1983
version, makes explicit that the person
or committee requesting the information
should be the recipient so that for
example, a request by one employee of
the legislative branch could not be
advanced as justification for allowing
the costs of a lobbying mailing to each
Member of Congress.
  The term "cognizant staff member"
has been inserted In response to
Congressional comments that the
November 1983 language might require
personal attention by legislators to each
request for factual or technical
information, f-initfrij the request from a
staff member to that person's
"cognizance" of the matters for which
the information is sought is intended to
ensure that the request is e bona fide
request for information of a truly factual
and technical nature, aot otherwise
readily available to the legislators.
  When the above changes were made
to greatly ease the implementation of
the exception, it became necessary to
put some limit on the costs that grantees
and contractors could charge the
Federal government when undertaking
                                                        22

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                      Federal  Register /  Vol. 49. No. 83  /  Friday. April 27. 1984  /  Notices
                                                                       18271
such lobbying. With the elimination of
the requirement far a written request
and the addition of the provision
allowing Congressional Record notices
•o suffice for providing such' information
at government expense, a corresponding
potential was created for unduly
substantial Federal financing of
lobbying.
   In order to ensure that the information
and its preparation are the true bases of
the cost section b(l) has.been revised to
require  that the response oust be
information chat "is readily obtainable
and can be put in readily deliverable
form." (This provision is intended to
restrict  and relate to the costs of
acquisition and delivery of information.
not the  time involved in responding co.
requests.) Provision of such assistance
justifies invoking the exception only
when the information is known or
obtainable—and in such form  as to be
readily produced and delivered. The
section b(l) exception was included in
order that legislators could draw on the
expertise and data possessed by
nonprofit organizations—even while
offered as part of a lobbying effort This
section, however, does not justify paying
for research projects or otherwise
incurring significant charges to grants or
contracts to develop information not
readily at hand.  .
  Likewise, in order to limit Federal
payment for lobbying to technical and
factual presentation* most likely to
produce expert information not readily
obtainable elsewhere, the further
requirement has been added that the
presentation be linked to information
"derived from the performance of a
grant contract or other agreement "This
provision permits the exception to be
invoked for information not only derived
from grants or contracts presently in
effect but also information on topics
directly related to grant or contract
performance. Nonetheless, a direct.
nexus between the topic of a grant
contract or other agreement and the
technical and factual presentation will
be required to be shown.
  While the revision seeks to maximize
the free  flow of information from
Federal  fund recipients to Congress, this
does not mean to allow grant funds to
pay for lobbying trips to Washington
simply because part of that trip was
devoted to delivering information to a
staff member, or delivering essentially.
unsolicited  statements'or testimony to a
Committee hearing.
  To deal with this problem, the
revision provides that Federally-
reimbursable costs under this exception
could not include travel lodging or meal
costs, except when incurred for the
purpose of providing Committee  hearing-
 testimony upon written request for a
 technical and factual presentation. To
 help ensure that the Federal Sauting of
 lobbying trips to Washington if limited
 to those which Congress deems
 necessary to its decision-making, the
 revision provides that these otherwise
 restricted coats (travel, lodging and
 meals) can only be "Incurred to offer
 testimony at a regularly scheduled
 Congressional hearing pursuant 13 a
 written request for such presentation
. made by the Chairman or Ranking
 Minority Member of the Committee or
 Subcommittee conducting such hearing."
 To the degree possible, the cost of
 providing information requested by
 legislators should be paid for out of the
 legislative budget Both houses of the
 Congress have rules providing'for •-
 payment of expenses relating to
 Congressional testimony. [S«*. Senate
 Resolution M8. 96-2: House Rule 33.)  '
   The American Civil Liberties Union
 challenged the entire section b(l)
 exception on the grounds that linking
 the exception to a special legislative
 invitation constitutes an impermissible
 regulation of free speech on the basis of
 content The reimbursement provisions
 set forth in section b{l)  do not
 discriminate against any person's
 speech but turn instead on the type of
 assistance rendered. Under Sagoo, the
 Supreme Court has ruled that no entity
 has a right to have its speech subsidized
 with Federal funds. Thus, it is
 constitutional to establish general cost
 guidelines to clarify the types of
 lobbying for which the government will
 provide reimbursement Indeed, this
 section is based upon a similar
 provision in the Internal Revenue Coda.
 it bears repeating that nothing in this
 revision prohibits grantees or
 contractors from conducting any form of
 lobbying or making any kind of
 communication to Congress they wish.
 as long as they do so with their own  •
 funds.
 G. Stat» Ltvfl Lobbying Rfiatfd to
 PotfotsiMUiGt of Gfont or CoofPUtit
 Section b(2)
   Section b(2) exempts lobbying
 otherwise unallowable under section
 a(3) to influence state legislation in
 order' to directly reduce the cost or to
 avoid impairment of the organization's
 authority to perform a grant contract or
 other agreement Such lobbying la
 permitted because it can directly benefit
 the Federal government by helping
 minimi™ the coats of award   ~
 performance. The exception does not
 however, permit the use of Federal
 funds to lobby state legislatures to
 promote an organization's ideological
 objectives merely because those
 objectives are consonant with the
 purposes of the grant or contract.
   A primary concern for several
 national organizations that commented
 on this proposal was the problem of
 determining how closely legislation
 must directly affect the performance of a
 grant or contract in order to fall within
 the proposed exception. A related
 concern was the possibility that an
 activity could serve multiple purposes.
 some of which would and some of which
 would not •'directly relate" to the
 organization's grant mission.
   In the final version, the term "directly
 affecting" has been deleted, and other
 changes made to the language to clarify
 the precise scope of the exception. Thus.
. the lobbying affected by the exception is
 specified to be" only that made
 unallowable by section a(3).
 Additionally, the phrase "at the state
 level" was deleted in favor .of '.he
 greater clarity provided by  the phrase
 "to influence state legislation." Finally.
 the phrase "or related activity"
 after"!obbying" has been dropped.
 consistent with changes throughout the
 revision.
  The most significant substantive
 change made to this section was.
 deletion of the phrase "ability of the
 organization." which several
 commentors argued was far too broad.
 For example,  the .ability of the
 organization" to perform a grant
 contract or other agreement could be
 construed to include those secondary.
 tangential, or speculative aspects of the
 activity that the November 1983
 preamble indicated did not fit properly
 within the exception. 48 FR at 5066S.
 OMB has deleted this language and
 replaced it with a reference to an
 organization's basic "authority" to
 perform the activity, thus eliminating the
 potentially overbroad applications that
 could be associated with the term
 "ability." The potential for such abuse is
 made evident by the incident described
 below;
  ANNAPOLIS. March 7—Administrator! of
 two coBmmity~beMQ pro^vu .or the
 mentally retarded led several hundred dients
 in a d«Bpn*traaon hire today  m lupport af
 biiia that would raite employes' ieianei-«nd
 tximpt their aifanizafioni from *tate
 pracureraeat laws '  ' *
  {The deounemaan organizer) seid that ill
 partopaflii in today's demotuvation had
 beea "educated iateniiveiy" about the rvaaoe
 for the detMtuntton and had •licted to
 cone, although soae ought have forgotten by
 the tteu they arrived he taid *  • •
  Deawoairaiioa organizers defended Use
 tactic laying the biila. if approved. «ni!
 directly affect the clients by UBpravwa '.he
 quality of can they receive •  • '[See.
 WatAiaften Pott March 11984. pp. CL CS.|
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 18272
Federal  Register / Vol. 49.  No. 83  /  Friday, April 27. 1984  /  Votices
   Undtr the November 1983 proposal, a
 strained argument could be mad* under
 the concept of "ability to perform" that
 the lobbying on the bills described
 above should fit within the exemption—
 a wholly unintended and inappropriate
 result By focusing on an organization's
  'authority" instead of its "ability" to
 perform, the revised language should
 eliminate any confusion as to what was
 intended by the exception. Moreover, by
 modifying the reference to "cost" to
 include only cost reductions, the revised
 language precludes lobbying for higher
 salaries and reflects the point made in
 the November 1983 preamble, that the
 exception is intended to allow lobbying
 for lower costs or belter performance of
• grants or contracts. These changes
 guarantee that the only lobbying costs
 reimbursable under the exception will
 be those that relate to the organization's
 direct performance of the grant or
 contract in the most cost-efficient
 manner possible, or its very  authority to
 perform the grant or contract
   A state waiver clause was added to
 the November 1983 notice in response to
 concerns raised by some nonprofit
 organizations. That clause would have
 permitted states to make Federally
 reimbursable the costs of all state
 lobbying by their Federally-funded
 subgnntees. Upon further review.
 however, the clause was determined to
 be superfluous, and potentially
 troublesome for several reasons. Some
 nonprofit commenters found the
 exception confusing* subject to partisan
 political pressures, and a needless cause
 of complexity for grant rules. Under
 aone of Circular A-122's other SO cost
 categories  do states have the right to
 determine  which costs will be eligible
 for federal reimbursement Furthermore.
 any lobbying "to influence State
 legislation in order to directly reduce the
 cost  or to avoid material impairment of
 the organization's authority to perform
 the grant contract or other agreement."
 is already excepted by the remainder of
 section b(2).

 H. Lobbying Authorized by Statute—
 Section b(3)

   Section b(3) exempts any activity
 specifically authorized by statute to be
 undertaken with funds from  Federal
 grants, contracts, or other agreements.
 This technical section reflects that the
 provisions of this Circular do not
 override statutory law. Only minor
 wording changes—with no change of
 substance—were made from the
 wording of this provision in the
 November proposal.
                  /. Exceptions Deleted from November
                  Proposal
                   Section c(2)*ia the November 1983
                  proposal specified that communications
                  with Executive Branch officials would
                  not be unallowable, with two exceptions
                  now set out in section a(3): (1} To
                  influence a decision to sign or veto
                  legislation, or {2} to influence state or
                  local officials to serve as conduits for
                  unallowable lobbying activities. This
                  section had been inserted solely for the
                  purpose of clarifying that the only
                  Executive Branch communications
                  regulated by the revision an those
                  relating to signing or vetoing legislation.
                  or serving as  a lobbying conduit
                   On the other hand, it is not intended
                  that proscriptions should be created by
                  implication from the fact that a type of
                  activity is not specifically excepted in
                  subparagnph b. Hence, section c(2) has
                  been omitted entirely, since the only
                  Executive Branch contacts unallowable
                  in the first place are those dealing with
                  a decision to  sign or veto enrolled bills.
                  as specified in section a(3). As indicated
                  by the new language introducing
                  subparagnph b, the final version of the
                  subparagnph contains only exceptions
                  to activities which are otherwise
                  unallowable.
                   Section c(3] of the November proposal
                  also has been deleted, since other
                  provisions of the revision make it
                  superfluous. This section concerned  the
                  application of the "tainting" principle of
                  the faaury proposal which was
                  eliminated in the November proposal
                  and replaced by the current proportional
                  •'allocation" principle. The inclusion of
                  section c(3) in the November revision
                  was inadvertent and has been corrected.
                 /. Accounting Treatment of Unallowable
                  Cotti—Siibparagraph c.
                   As with the Federal Acquisition
                  Regulation and as is already the ease
                  under Circular A-122's general rules for
                  unallowable costs, the costs identified
                  as unallowable by this revision include
                  not only costs of the direct activity itself
                  but also the costs  of other activities
                 supporting that activity. For example, if a
                  lobbyist spends four hours lobbying the
                  Congress and an additional eight hours
                  in study, consultation, and preparation
                  for the lobying. the full twelve hours.
                  with the cost  of any support services
                  and any other costs attributable to the
                  lobbying activity,  are disallowed.
                   As emphasized in the comment
                  published with the text of the November
                  proposal only the portion of those cost
                  items allocable to the lobbying activity
                  is unallowable. Thus, if an employee
                  spends 60% of his time on lobbying
                  activities and 40% on Federal gnat
activities, 40% of the salary may be
allocated to the grant This approach is
consistent with the FAR lobbying cost
treatment provision, as well as with the
traditional accounting method of
prorating costs between allowable and
unallowable activities.
  OMB considered and rejected  an
alternative method of allocating  costs of
items used for both lobbying activities
and grant or contract purposes, namely,
the concept that no Federal money can
be used to pay for any portion of a cost
item used for lobbying activities: (1) In
any way, or (2) over 3% of the time. The
OMB proposal published in January '.983
followed this stricter approach.
Commenters argued that it would
increase the cost of performing Federal
grants and contracts by effectively
requiring them to separate their
lobbying activities from their grant or
contract activities and could also lead to
inefficient duplication of equipment ana
facilities. They also argued :hat it would
burden the First Amendment rights of
contractors and grantees because
engaging in lobbying activities could
result in otherwise legitimate costs
being disallowed. As set forth  in the
November notice. OMB has adopted a
different approach which alleviates
these concents and serves the  goal of
assuring government neutrality by
disallowing reimbursement of Federally
appropriated funds used for certain
types of lobbying.

K. ladinet Cast Rate Proposal—-section
efl}

  Subparagnph c establishes an
administrative framework for the overall
revision. Section c(l) follows current
cost  allocation principles familiar to
grantees and contractors and
establishes a general format similar :o
that  now applicable to comparable
unallowable activities.
  Indirect cost rate negotiations  are
conducted between an organization and
a single cognizant agency on an
organization-by-organization. rather
than on a gnnt-by-grant basis. This
approach saves agencies and recipient
organizations considerable time  and
effort in cases when the organization
receives more  than one grant or
contnct The revision has been modified
to reflect this approach. Further,  section
c(l) follows existing accounting practice
and emphasizes that lobbying  costs
must be identified and dealt with
appropriately,  in accordance with the
Circular's indirect cost rate provisions.
  Although very few commenters
criticized section c(l), some—including
Congressional sources—expressed
concern that the November proposal's .
                                                      - 24 -

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                               Federal xegiatBf / Vol.  49. Mo. 83 / Friday.  April 17.  1984 / Notices
                                                                                                              18273
•4.
language could be broadly interpreted
by agency auditors. Further, they
suggested that lobbying costs, because
of their political nature, should be
subject to only very limited/if any.
disclosure.    ''   '._
  The purpose of section c(l) was
simply to require accounting information
necessary for the government to
calculate the reimbursement'of indirect
(overhead) costs. Such information is
already made available to auditors
through existing recordkeeping
requirements in Circulars A-122 and A-
110.
  However, to clarify OMB's intent to
request only the minimum amount of
accounting data to comply with existing
accounting guidelines. OMB has
rewritten section cf 1) following
consultation with GAO and.
Congressional staffs.  In essence, only
the minimal information that is needed
for the calculation 01  Federally*.
reimbursed overhead costs is now
required, and organizations are
completely exempt from this section  if
they do not seek  such Federal
reimbursement.
  The new section c(l) says that only
the total lobbying costs must be
identified in the indirect coat rate
proposal This will allay concerns of
nonprofit groups'that  separate
accountings and disclosures wen
mandated for each of the five
component definitions of lobbying set
forth in sections a(l)-«(S). Moreover.
since this information is aad* necessary
only for indirect cost calculations in
order to avoid Federal subsidization  of
the lobbying process, this sentence also
explicitly makes clear that no such
disclosure is required by the revision
unless the grantee seeks reimbursement
for indirect costs. (See also. Internal
Revenue Service Form 990. requiring
lobbying cost disclosure, which many
nonprofit organizations now submit)
  In comparison with the November
proposal, the new section c(l) sharply
reduces the accounting data requested.
eliminates language that some thought
gave agencies too much discretion in
requesting information, and explicitly
des the treatment of lobbying costs to
existing Circular A-122 requirements.
The November proposal's requirement
of "a statement identifying by category.
costs attributable in whole or in part" to
lobbying, as well as the requirement of a
statement of "how (lobbying costs) are '
accounted for," have been deleted.
  Wh*n the existing Circular A-122
accounting requirements an reviewed in
conjunction with the uniquely lenient
recordkeeping treatment provided for
lobbying in section c(4) of the revision, it
becomes dear Oat such information is
 the minimum necessary to achieve an
 acceptable level of accounting integrity,
 and that the overall recordkeeping
 required for lobbying costs is much less
 than that required for any other type of
 allowable or unallowable cost
  It should of course be noted that the
 stated requirement that organizations
 must "separately identify" their total
 lobbying costs cannot be construed to   _
 limit auditors or indirect cost analysts
 from requiring more detailed
 breakdowns when such information
 would normally be required under
 existing indirect cost rate proposal
 guidelines. Sea. ».%„ the Department of
 Health and Human Services' "Guide for
 Nonprofit Organizations" (May 1983) at
 73 (Sample Indirect Cost Proposal
 Format—Direct Allocation Method).
 Additionally, if auditors suspect that an
 organization may have misstated its
 unallowable lobbying costs, they are aot
 constrained from requesting any data
 normally accessible under Circulars A-
 122 and A-110. as long as such data
 doaa not fall under the recordkeeping
 exemption provided in section c(4).
  Section c(l) follows existing Circular
 A-122 requirements that provide for the
general disclosure of the coats spent on
 unallowable activities. TAJ* requirement
 is necessary so that when the
government calculates the amount of an
 organization's indirect costs {/.A.
 overhead) that it will pay. it does oat
 include the coats of unallowable
 activities) that thai organization happens
 to account for aa indirect costs.
 Paragraph BJ of the existing
Attachment A to Circular A-122 now
requires this:
  The costs of certain activities ire net
 allowable as charges to Federal awards (see,
 for example, fond raising costs ia paragraph
 19 of Attachment 8). However, ma though
 these casts are unallowable for purposes of
computing charges ta Ftdaral awards, they
nonetheless auat be treated as direct costs   •
 for purposes of delerauaiag indirect cast
rates and be allocated their share of the
orianizadoB'i indirect casts if they represent
activities which: (1) Include fee salaries of
personnel (21 occupy apace, and (3] benefit
from the aiaanizsaoa's indirect casts. •

  Some persons argued that
unallowable costs need not be reported.
since they are not Federally reimbursed.
However, it is impossible for the
government to properly determine the
extent to which it should pay for an
organization's indirect coats unless it
can determine what portion of the
organization's total indirect coats an
from allowable activities/and what
portion an unallowable. Such natment
is currently required under Circular A-
122*s Attachment A. Section D:
 "Allocation of Indirect Costs and
 Determination of Indirect Cost Rates."
   Further, some persons argued that the
 disclosure requirement should expressly
 authorize that initial submissions in
 indirect cost rate proposals set forth an
 aggregated figure representing both
 lobbying and other unallowable costs.
 Such an approach would codify the
 current practices of most (but. it should
 be pointed out not all) grantees, a not
 unsurprising fact in light of the
 vagueness of the current standard and
 the relative lack of audit resources
 applied to determining whether lobbying
 activities are supported by Federal
 grants and contracts. Then is agreement
 that auditors would be able to obtain
 and would indeed require disaggregated
 information on lobbying costs if they
 engage in specific auditing of lobbying
 disallowances.
   In weighing this proposal against
 agency auditors' concerns that detailed
 breakdowns of lobbying costs are
 critical to proper cost analyses, OMB
 has resolved to require that only the
 total amount of lobbying costs be
 initially disclosed in the indirect cost
 rat* proposal. OMB has determined that
 it would make no sense to rely on
 varying and what would almost
 certainly ba inconsistent initiatives of
 individual auditors, regional offices and
 agencies to inquire, as a matter of
 standard practice, into whether lobbying"
 activities an being improperly
 subsidized through indirect cost
 allocations—or to rely on random audits
 to accomplish this purpose. Thus, the
 final revision requires, consistent with.
 paragraph BJ of Attachment A and at a -
 level of specificity less than that
 generally provided for fundraising
 activities, i.a.. disclosure only of a total
 lump sum lobbying cast figure. .
 Disclosure of such a figure will give
 auditors a basis for further inquiry into
 lobbying cost estimates set forth in
 particular indirect cost rate proposals.
 and will provide a level of detail that
 actually would be minimally required in
 every instance in which an auditor
 seeks to determine whether Federal
 subsidization of lobbying is taking place
 through the overhead mechanism. Given
 the 29% rule which makes more difficult
' auditor disallowances of lobbying
 estimates, this balanced compromise—
 and reduction in the level of detail
 called for in the November 1983
 proposal—is in OMFs judgment a
 minimal requirement consistent with the
 Circular's accounting guidelines.
                                                               .-  25  -

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18274	Federal Register / Vol.  49. No. 83 / Friday. April  27. 1964 / Notices
L Certification Requtnattnt—Section
42)
  The requirement la section_a(2) of the
November 1983 prapotaL that
certification accompany the Financial
Status Report has b««n changed in tba
final version to a requirement that
certification accompany aa
organization's annual Indirect cost rate
proposal Sinca a Financial Status
Report is required for each grant that an
organization baa, while an organization
must file only ona indirect coat rate
proposal per year to cover  ail of ita
grants, this change reduces paperwork
mrut Administrative effort.
  Further, lobbying expenses art
usually included in indirect costs, which
an calculated on an organization-wide
basis. Consequently, the appropriate
place to certify such coats is in the
annual indirect cost rate proposal as
required under the  Defense and GSA
proposed revisions. In addition, seat
future audits will be "single audits" of
all Federal funds received by the
grantee, so there will be less emphasis
on the Financial Statue Report and more
«t the indirect cost rate proposal.

M Reeor&eeaiag—SeetiottM e(3) and
44)
  Documentation of the amounta of
allowable ""^ unallowable costs
became a necessity when the method of
cost treatment was changed from total
disallowance of cost items  partially
involved in lobbying (the January 1983  ,
proposal) to the typical "allocation'* coat
treatment Tie principal alternative
considered by OMB wea to adopt the
documentation philosophy  of the
restrictions on lobbying in the prior
Defense. GSA, and NASA procurement
regulations. /.*- to place the burden on
the grantee  or the contractor to prove in
all instances the appropriateness of a
cost This approach, while consistent
with the cost principles in general
would entail an implied burden on some
indirect cost employees to «•»*»•«»«
records (time logs, calendars, or the like)
to establish the proportion  of their time
spent on lobbying. Tins would be of
particular concern for high  level official*
of grantees and contractors who. in the
ordinary course of business, may engage
in only a small ip"™11* of lobbying
OMB (along with Defense. CSA. and
NASA) will therefore allow grantees
and contractors to certify in good faith
the amount of their employee's time
attributable to lobbying activities.
  No detailed recordkeeping
requirements have been included in  this
revision, as these requirements are
generally set forth for all nonprofit
organizations in OMB Circular A-llft
. "Grants and Agreements with
 Institutions of Higher Education.
 Hospitals, and Other Nonprofit
 Organizations: Uniform Administrative
 Requirements" (See. e.g.. Circular A-
 110. Attachments C and F.) That Circular
 generally requires grantees, inter alia, to
 keep for a period of three years,
 "[fjlnandal records,  supporting
 documents, statistical records, and all
 other records pertinent to (grants)," and
tinent
  rds
 to access for audit purposes "
 books, documents, pa
 of * • recipient organizations."
   Section c(3) restates the general rule
 for cost documentation, but is modified
 by section c(4J, which provides that for
 the purposes of complying with this
 revision, employees are not required to
 prepare or «*•">*•«• time logs.
 calendars, or similar records to

 treated as an indirect cost This means
 that the agency and auditor must rely on
 the employee's good-faith estimates of
 time spent in lobbying, or upon other
 evident* not otherwise precluded As
 noted earlier, the absence of time logs or
 comparable records for indirect coat
 time net kept pursuant to the discretion
 of the grantee or contractor will not
 serve aa a basis for government auditors
 disallowing claims of allowable coats by
 contesting unallowable lobbying time)
 estimates except In two ******
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                      Federal  Register /  VoL 49.  No. 33 / Friday.  April 37.  1984 / Notices
                                                                       18275
 "lobbying" is appropriately designated
 •• paragraph 821. necessitating the
 renumbering of former paragraph* 321
 through BSO as B22 through BS1.

 VID. Paperwork Raiducdoa Act
 Considerations
   The November notice invited
 "comments about the appropriateness of
 collection of information requirements
 in.this proposal" to be submitted to
 OMB's Office  of Information and
 Regulatory Affairs. Forty-three such
 comments were received. Of these.
 twenty expressed general concerns
. similar to chose of other commenters but
 raised no specific paperwork burden
 issues.
   The twenty-tore* other commenters
 followed, almost verbatim, points raised
 by the Canter  for Non-Profit
"Corporations.  These alleged that a
 "substantial increase" in paperwork
 would result from the recordkeeping
 mandated by Circular A-122. The
 commenters asserted that the additional
 paperwork burden would occur to: (1)
 Meet requirements for the annual
 indirect cost proposal and (2) maintain
 the records required to demonstrate that
 coats an allowable or unallowable.
   However, by establishing uniform and
 well-defined guidelines for lobbying
 coats, and by explicitly restricting the
 paperwork that auditors can require for
 documentation of such costs, this
 revision may significantly reduce the net
 paperwork burden to which grantees an
 now legally subject Clearly, some
 grantees may avoid the existing
 paperwork requirements by ignoring the
 multiple—and oftern vague—sets of
 lobbying reimbursement restrictions that
 have been issued by the various
 agencies, and likewise ignore the
 existing accounting rules in Circular A-
 122 regarding treatment of such coats.
 Such non-compliance may currently
 exist in part because government
 auditors have found it difficult to
 efficiently enforce the myriad of vague
 restrictions on lobbying costs. With the
 clear guidelines provided by this
 revision, agency and audit enforcement
 will increase. Those grantees alnady in
compliance with the differing seta of
 restrictions will enjoy a much-reduced
paperwork burden: those who have
previously ignored these restrictions will
 find that non-compliance is more likely
 to be questioned by government
auditors.
   Moreover, regardless of whether
grantees currently choose to adhere to
existing rules on lobbying, most
routinely maintain detailed books.
regarding their expenditures. Annual
financial planning by the nonprofit itself
 and filing requirements of the Internal
 Revenue Service alnady require
 maintenance of detailed records.
   In general. Circular A-122 will not *
 require employees to keep a second set
 of books. s.g.. time logs, to record
 lobbying. In fact, most employees who
 engage in lobbying are explicitly
 exempted from any requirements  to
 keep time'logs or other similar
 documents. This is because most
 lobbying is done by indirect cost (e.g..
 headquarters staff) employees, and
 section c(4) states that employees who
 certify that they spend less than 29% of
 their compensated time lobbying do not.
 have to keep such records documenting
 that portion of their time that is treated
 as an indirect cost Since employees
 whose time is charged directly to
 contracts already must keep such
 records, no special rale for direct cost
 time ia necessary.
   The 23 critics of the revision also
 submitted identical comments to the
 effect that "(tjax dollars will be diverted '
 to. unnecessary paperwork and   .
 needlessly drawn away from the
 purpose of the organizations by these
 requirements." As discussed above, the
 fact that the revision decreases, in
 general, existing paperwork
 requinmenta will reduce the current
 recordkeeping coats incurred  to comply
 with existing restrictions.
   Some commenters argued that
 differing Internal Revenue Code and
 Circular A-122 standards would require
 maintenance of two seta of financial
 books. Mo commenters were able to
 specify any situation in which a detailed
 set of expenditure records for lobbying
 would not provide sufficient information
 to serve the filing or audit requirements
 of the Internal Revenue Service aa well
 as those of the various grant or
 contracting agencies  implementing the
 revision.
   OMB will review all agency
 information burden requests to
 implement Circular A-122 according to
 the standards of the Paperwork
 Reduction Act None of the comments
 OMB received from agencies mentioned
 any specific concern over a possible
 increase in paperwork.

 DC. Enforcement

   Circular A-122 is a management'
- directive to Federal agencies
 establishing cost principles for use in
 connection with grants and contracts
 with nonprofit organizations.  It does not
 contain its own enforcement
 mechanism, though its terms an
 incorporated in grants and contracts
 through agency regulations or groat
 instruments. The degree and natun of
 enforcement of these anti-lobbying
 provisions will depend, therefore, on
 operational experience and competing
 demands on enforcement resources.
   1. Voluntary compliance. The bedrock
 for enforcing these provisions is
 voluntary compliance by grantees and
 contractors. In the past restrictions on
 the use of Federal funds for lobbying
 have been inadequately communicated
 and defined. Neither agencies nor
 recipient organizations devoted much
 attention to them. This revision is
 expected to improve -ompiiance  .
 significantly by:
.   •  Defining unallowable activities so
 that organisations can comply in good
 faith: and
   •  Providing occasions (indirect cost
 rate negotiations) in which responsible
 officials of the grantee or contractor will
 focus specifically on the issue of the
 organization's compliance.
   To assut organizations in complying.
 agencies an to be prepared to resolve
 definitional questions concerning
 potential expenditures in advance. This
 procedure should reduce the inevitable
 difficulty of interpretations at the -
 margin.
 . 2- Sanctions. OMB considered and
 rejected as too stringent a penalty •
 provision which would require the .
 return to the Federal government of all
grant or contract funds received by a
 nonprofit organization found to be using
Federal fund* to engage in lobbying.
 Instead, penalties for violating this
revision an the some aa for violations of
 existing Circular A-122 provisions. The
principal sanction in the event of minor
or unintentional violations is cost
recovery, i.a.. the Fedenl agency will
obtain reimbursement from the
contractor or grantee of misspent funds.
In man serious cases, contracts and
grants can be suspended or terminated.
or contractors and grantees can be .
debarred from further awards. The
availability of these sanctions for
violating the anti-lobbying nsfrictiona
of appropriations legislation has been
confirmed by the Office of Legal
Counsel of the Department of Justice.
  3. Audit*. Contractors and grantees
an currently subject to audit
requirements, and to the possibility of
audit by agency Inspectors General or
the Comptroller General: however, only
ranly have audits focused on         .
compliance with anti-lobbying
provisions due to the difficulty of
determining proper adherence to a
myriad of frequently vague restrictions.
After uniform coat principle* an
promulgated, it will become possible for
uniform and effective audit enforcement
to take place. Stratified audits and other
strategies can be used to create an
                                                      27

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18276
Federal  Register / Vol 49.  No. '83  /  Friday.  April 27. 1964  /'• Notices
incentive for greater compliance among
all grantees and contractors.
Alternatively, promulgating • defined
set of rales can and wilt serve-as a      .
protection against audit harassment
and will and ihould make for fairer and
simpler audits for granteea and
contractor). This should be of particular
benefit to smaller grantees and
contractor* who lack the means and
support staff to contend with audits
under the vague, ambiguous, and diverse
rales now in effect. With expanded
Inspector General and agency audit
staffs now in place, the protection*
afforded by the proposal are manifest
X. Designation as "Non-Major" Rut*
   OMB Circulars are not "rules" within
the meaning oflhe Administrative
Procedures Act or Executive Order No.
12291. Instead, they are management
directives by which OMB. on behalf of
&e President, instructs Executive
Branch entities how to exercise their
authority in matters subject to agency
discretion. Even if the Circular were
considered e "rule," however. OMB has
determined that the revision to Circular
A-122 would not qualify as a "major
rule" under the criteria as listed in
Executive Order No. 12291. which
defines a "major rule" as "any
regulation that is likely to result in:
   (1) An annual effect on the economy
of S100 million or more:
   (2) A major increase in costs or prices
for consumers, individual industries.
Federal state, or local government .
agencies, or geographic regions: or
   (3) Significant advene effects on
competition, employment, investment.
productivity, innovation, or on the
ability of United Suies-bssed
enterprises to compete with foreign-
based enterprises in domestic or export
markets.
   The principal effect of the revision
wiU be to ensure that Federal grant
funds are used for the purposes for
which (hey were intended, and not to
facilitate lobbying activities. As noted
above, current financial control
procedures do not permit an accurate
estimate of the amount of tax dollars
now diverted to lobbying efforts by
grantees and contractors. Whether large
or small correction of this problem will
produce a net gain to the intended
beneficiaries of Federal programs. The
costs to be considered are primarily
accounting and recordkeeping costs for
grantees and contractors, as well as
Federal agencies. These additional
costs, however, are minimal in both
absolute and relative terms. Indeed, in
many instances, the revisions should
reduce audit and compliance costs.
Furthermore, much of the accounting
                  work that the revision requires is
                  already mandated by other sections of
                  Circular A-122. Circular A-110, or other
                  provisions of law.
                   Issued In WsiMAtton. O.C. April 21 :9*4.
                  Caoaes C Bryant
                  Deputy Aiuxiatf Dinctotfet
                  Admuiittration.
                   1. Insert a new paragraph in
                  Attachment B. as follows: "B21
                  Lobbying"
                   a. Notwithstanding other provisions of
                  this Circular, costs associated with the
                  following activities are unallowable:
                   a.(l) 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;
                   a.(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;
                   a.(3) Any attempt to influence: (1) The
                  introduction of Federal or state
                  legislation: or (U) the enactment or
                  modification of any pending Federal or
                  state legislation through communication
                  with my member or employee of the
                  Congress or state legislature (including
                  efforts to influence State or local
                  officials to engage is similar lobbying
                  activity), or with any government
                  official or employee in connection with
                  a decision to sign or veto enrolled
                  legislation:
                   a.(4) Any attempt to influence: (i) The
                  introduction of Federal or state
                  legislation: or (il) 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.
                 fuadraising drive. lobbying campaign or
                  letter writing or telephone campaign; or
                   a.(3] 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.
                   b. The following activities an
                  axcepted from the coverage of
                  subparagraph a:
                   b.(l) Providing a technical and factual
                  presentation of information on a topic
                  directly related to the performance of a
                  grant, contract or other agreement
                  through hearing testimony, statements
 or letters to the Congress or a state
 legislature, or subdivision, member, or
 cognizant staff member thereof, in
 response to a documented request
 (Including e Congressional Record
 notice requesting testimony or
 statements for the record at a regularly
 scheduled hearing) made by the
 recipient memoer. legislative body or
 subdivision, or a cognizant staff member
 thereof: provided such information is
 readily obtainable and can be readily
 put in deliverable form: ind further
 provided that costs under thjs section
 ;or travel lodging or meals are
 unallowable unless incurred to offer
 testimony at a regularly scheduled
 Congressional hearing pursuant to a
 written request for such presentation
 made by the Chairman or Ranking '
 Minority Member of the Committee or
 Subcommittee conducting such hearing.
   b.{2) Any lobbying mace unallowable
 by section a.(3) to influence State
 legislation in order to directly reduce the
 coat or to avoid material impairment of
 the organization's authority to perform
 the gnat contract or other agreement.
   b.(3) Any activity specifically
 authorized by statute to be undertaken
 with funds from the grant contract or
 other agreement
   c.(l) When an organization seeks
 reimbursement for indirect costs, total
, lobbying costs  shall be separately
 identified in the indirect cost rate
 proposal and thereafter treated as other
 unallowable activity costs in
 accordance with the procedures of
 paragraph B3 of Attachment A.
   c(2) Organizations shall submit as
 part of their annual indirect cost rate
 proposal a certification that the
 requirements and standards of this
 paragraph have been complied with.
   c.(3) Organizations shall maintain
 adequate records to demonstrate that
 the determination of costs as being
 allowable or unallowable pursuant to
 paragraph B21  complies with the
 requirements of this Circular.
   c^4) Time logs, calendars, or similar
 records documenting the portion of an
 employee's time mat is treated as an
 indirect cost shall not be required for the
 purposes of complying with
 subparagraph c, and the absence of such
 records which are not kept pursuant to
 the discretion of the grantee or
 contractor, will not serve as a basis for
 disallowing claims of allowable costs by
 contesting estimates of unallowable
 lobbying time spent by empioyeee
 during any calendar month unless: (i]
 The employee engages in lobbying, as
 defined  in subpangrapht • and b, more
 than 23* of his compensated hours of
                                                     28

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_^^	   Federal   .gister / Vol. 49.  No. 83 / Friday. April .   1984 / Notices                18277

 employment during thai calendar month;   the Interpretation or application of        contudiif tht lawfulness of such a
 or (ii) the organization hai materially      paragraph B2L Aay such advaae*         determination.
 mutated allowable or unallowable       resolution iball bt binding* in any           2. Ranumbtr subaaquant paragraph!
 costs within tha pracading Bva yaar       nib'atquant lattlamanta, audits or         of Attaehmant &
 period.                 -              iavastigatfona with mpact to that grant    mummuMnfrraitamat
  c.(5)AgancJatshaU«tabliih           or contract for purpoaaa of               INOTt Tlii. rtpriat ineorporat., comettoiu
 proeadures for molvuig in advanca, in     intarpntadoa of thia Circular providad    that u* pubUihtd in tha r«rf»«l Xagiitw of
 consultation with OM& any significant     howavar. that thia shall not ba eonatniad   Tumday. May
 queiaona or diaagreaoanta concerning     to prevent a contractor or grantee from     MUM coca
                                                 29


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13278
Federal Register /  Vol. 49. No. 33 / Friday. April 27. 1984 / Rules and Regulations
DEPARTMENT OF DEFENSE

GENERAL SERVICES
ADMINISTRATION

NATIONAL AERONAUTICS AND
SPACE ADMINISTRATION

41 Cm Part 31

(•Men! Acquisition Ctreuiv M-J]

Federal Acquisition Regulation
(NOTE: This rtpnni incorporates corrections
thai an published in the Federal Raeistar of
Tuesday. May a. 19*4.)
       'X Department of Defense
                      in this Federal Acquisition Circular is
                      effective July 1. 1964.
                      PaOida Q. SchoNi.
(DoO). General Services Administration
(GSA). National Aeronautics and Space
Administration (NASA).
ACneic Final rule.

SUMHANV: This Federal Acquisition
Circular (FAQ amends the Federal
Acquisition Regulation (FAR) with
respect to the lobbying cost principle in
the FAR subpaxt that covers contract
cost principles in contracts with •
commercial organizations.
•pvicnvt DATE July 11984.
mum
                            rTACT:
Roger M. Schwartz. Director. FAR
Secretariat Room 4041. GS Building,
Washington. D.C 20405. Telephone (202)
S2M7SS.

SUPtUMIMTAJIY IN*O«tATiO*K The
Office of Management and Budget
(OMB) has directed chat the agencies
implement the intent and substance of
the OMB Circular A-122 lobbying cost
principle in FAR Subpart 31-2. Contracts
with Commercial Organizations.
Accordingly, the lobbying cost principle
in OMB Circular A-122 has been edited
and conformed to FAR format The
revised cost principle in FAC 84-2
defines unallowable lobbying cost
activity  in a manner consistent with the
OMB circular. '

List of Subjects in 41CFR Part 3t

  Government procurement
Rotw M. Scfawwo.
Dirtctar. FAX Seerettrwt  • .
AofUM.1984.

Federal Acquisition Circular

(Nume«r 84-2]

  Unless otherwise specified, all
Federal  Acquisition Regulation (FAR]
and other directive material contained
                      Auitteat Administrator for Procartmtnt
                      Mary Aaa Gilleece.
                      Qtptttjr Undtf Sxntary afDtfmtt
                      f Acquisition Manogtonnt).
                        Federal Acquisition Circular (FAC)
                      94-2 amends the Federal Acquisition
                      Regulation (FAR) as specified below.
                      The following is a summary of (he
                      amendment:

                      Item I— Lobbying Coeta
                        The Office of Management and Budget
                      (OMB) has directed that the agencies
                      implement the mt§nt and substance of
                      the OMB Circular A-122 lobbying cost
                      principle in FAR Subpart 31.2. Contracts
                      with Commercial Organizations.
                      Accordingly, the lobbying cost principle
                      in OMB Circular A-122 has been edited
                      and conformed to FAR format The cost
                      principle in FAR 31.205-22 is revised to
                      define unallowable lobbying cost
                      activity in a manner consistent with the
                      OMB circular.
                        Therefore. 48  CFR is amended as set
                      forth below.
                      AntfaotUr 40 U.S.C. 4M(e|: Chapter 137. 10
                      U.S.C.. tad 42 U.S.C 2453(0.

                      PART 31— CONTRACT COST
                      PRINCIPLES AND PROCEDURES
                        1. Subsection 31.205-22 ia revised to
                      read as follows:
                        (a) 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 activities:
                        (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, or (ii) the enactment or
                      modification of any pending Federal or
                      state legislation through rflHiiini'*'^***^''
                      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 with 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 ariy 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 activities.
   (b) The following activities an
 exeepted from the coverage of fa) above:
   (1) Providing a  technical and factual
 presentation of information on a topic
 directly related to the performance of a
 contract through hearing testimony.
 statements or letters to the Congress or
 a state legislature, or subdivision.
 member, or cognizant staff member
 thereof, in response to a documented
 request (including a Congressional
 Record notice requesting testimony or
 statements for the record at a regularly
 scheduled hearing) made by the
 recipient member, legislative body or
 subdivision, or e  cognizant staff member
 thereof: provided such information is
 readily obtainable and can be readily
 put in deliverable form: and further
 provided chat costs under this section
 for transportation, lodging or meals an
 unallowable unless incurred for the
 purpose of offering testimony at a
 regularly scheduled Congressional
 hearing pursuant to a written request for
 such presentation made by the
 Chairman or Ranking Minority Member
 of the Committee or Subcommittee
 conducting such hewing.
   (2) Any lobbying made unallowable
* by (a]{3) above to influence state
 legislation in order to directly reduce
 contract cost or to avoid material
 impairment of the contractor'! authority
 to perform the contract.
   (3) Any activity specifically
 authorized by statute to be undertaken
 with funds from the contract.
   (c) When a contractor seeks
 reimbursement for indirect costs, total
 lobbying costs shall be separately
 identified in the indirect cost rate
 proposal and thereafter treated as other
 unallowable activity coats.
   (d) Contractors shall submit as part of
 their annual indirect coat rite proposals
 a certification that the requirements and
                                                     30

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              Federal Register /  Vol. 49.  No. 83 /  Friday,  April 27.  1984 / Rulaa and  Regulations
                                                                      18279
standard* of this subnotion have been
eompifad with.
  (t) Contractors shall maintain
adequate rteorda to demonstrate that
the certification of cojits u being
ailoweble or unalloweble pursuant to
thia subsection complies with the
requirements of this subsection.
  (f) Time logs, calendars, or similar
records documenting the portion of an
employee's time that is treated as an
indirect cast shall not be required for the
purposes of complying with this
subsection, and the absence of such
records which are not kept pursuant to
the discretion of the contractor will not
serve as a basis for disallowing
allowable costs by contesting estimates
of unallowable lobbying time spent by
employees during any calendar month
unless: (1) the employee engages in .
lobbying, aa defined in (a) and (b)
above, more than 23* of the employee's
compensated hours of employment
during that calendar month: or (2) the
organization has materially misstated
allowable or unallowable costs within
the preceding five year period.
  (l) Existing procedures should be
utiliied to resolve in advance any
significant questions or disagreements
concerning the interpretation or
application of this subsection.
(Fl OH. M>»MI ntt «-»-»• V** «•!

[NOTE: This reprint Incorporates eomctioiu
that ue published in the  Ftdmi R*ctoMr of
Tuesday. May a. ISM.)
                                                 -  31  -

-------

-------
                   APPENDIX. 4
Tuesday
July 8, 1980
  Not* Thla reprint Incorporates
  corrections published at 48 PR 17185,
  Tussday, March 17,1S81.
Part II!

Office  of
Management and
Budget	
Circular A-122, "Coat Principles for
Nonprofit Organisations"

-------
 46022
Federal Register  /  Vol.  45. No.  132 / Tuesday. July 8. 1980 / Notices
 Of riCt. Of MANAGEMENT AND .
 BUDGET

 Circular A-122, "Cost Mndpto* for
 Nonprofit Organizations"   ~
 (Not*: This reprint incorporate* corrections
 published *t «« FR 17185. Tuesday, March 17.
 1981.)
 AQINCY: Office of Management and
 Budget.
 ACTION; Final Policy.	

 SUMMARY: This notice advises of a new
 OMB Circular dealing with principles for
 determining costs of grants, contracts.
 and other agreements with nonprofit
 organizations.
   The Circular is the product of an
 interagency review conducted over a ,
 two-year period. Its purpose is to
 provide a set .of cost principles to
 replace existing principles issued by
 individual agencies. These have often
 contained varying and conflicting
 requirements, and created confusion
 among agency administrators, auditors.
 and nonprofit officials. The new Circular
 will provide a uniform approach to the
 problem of determining costs, and
 promote efficiency and better
 understanding between recipients and
 the Federal Government.
 tmcnvi DATE The Circular becomes
 effective on issuance.
 ran SVHTMWI INFORMATION CONTACT:
 Palmer A. Marcantonio. Financial
 Management Branch. Office of
 Management and Budget. Washington.
 D.C. 20503, (202) 395-4773.
 tUPVUMlNTANY INFORMATION: Before
 the Circular became final there was
 extensive coordination with the affected
 nonprofit organizations, professional
 associations. Federal agencies and
 others. All interested persons were
 given an opportunity to comment on the
 proposed Circular through informal
 consultations and a notice in the Federal
 Register, in response to our requests for
 comment, we received about 100 letters
 from Federal agencies, nonprofit
 organizations, associations, and other
 interested members of the public. These
 comments were considered in the final
 version of the Circular. There follows a
 summary of the major comments and the
 action taken on each.
  In addition to the changes described.
 other changes have been made to
 improve the clarity and readability of
 the Circular. To the extent possible, we
 have tried to make the language of this
 Circular consistent with that of cost
 principles for educational  institutions
 (Circular A-21), and Slate and local
 governments (Circular 74-4).
Summary of Significant Changes:
  Set forth are changes that have been
 made in the final Circular as a result of
                  public comments. The more significant
                  changes to the basic Circular and
                  Attachment A include:
                    t. Paragraph 2. "Supersession" was
                  added to the basic Circular to make it
                  clear that this Circular supersedes'cost
                  principles issued by individual agencies.
                    2. Paragraph 4 of the basic Circular
                  has been amended to make it dear that
                  the absence of an advance agreement on
                  any element of cost will not in itself
                  affect the reasonableness of allocabitity
                  of that element. Also, this paragraph
                  was amended to make it dear that
                  where an item of cost requiring prior
                  approval if specified in the budget,
                  approval of the budget constitutes
                  approval of the cost.
                    3. Paragraph 5 of the basic Circular
                  has been changed to remove any doubt
                  as to which nonprofit organizations
                  would not be covered by the Circular.
                  Now. Appendix C to the Circular lists all
                  exclusions.
                    4. Paragraph a was added to the basic
                  Circular to permit Federal agendas to
                  request exceptions from the
                  requirements of the Circular.
                    S. Paragraph &2. was added to
                  Attachment A to cover the negotiation
                  and approval of indirect cost rates, and
                  to provide for cognizance arrangements.
                    The more significant changes to
                  Attachment B to the Circular tndude:
                    1. Paragraph 8, Compensation for
                  Personal Services, was modified to:
                    a. Permit Federal agencies to accept a
                  substitute system for documenting
                  personnel costs through means other
                  than personnel activity reports.
                    b. Clarify previsions covering the
                  allowability of costs for unemployment
                  compensation or workers'
                  compensation, and costs  of insurance
                  policies on the lives of trustees, officers,
                  or other employees.
                   c. Make unallowable any increased
                  costs of pension plans  caused by
                  delayed funding.
                   d. Delete a paragraph dealing with
                  review and approval of compensation of
                  individual employees.
                   2. Paragraph 7. Contingencies, was
                  changed to make it clear that the term
                  "contingency reserves'* exdudes self-
                  insurance reserves or pension funds.
                   3. Paragraph 10 was  modified to
                  provide that the value of donated
                  services used in the performance of a
                  direct cost activity shall be allocated a
                  share of indirect cost only when (a) the
                  aggregate value of the service is
                  material, (b) the services  are supported
                  by .a significant amount of the indirect
                  cost incurred by the organization, and
                  (c) the direct cost activity is not pursued
                  primarily for the benefit of the Federal
                  Government. Provisions were also
                  added to this paragraph for the
 cognizant agency and the recipient to
 negotiate when there is no basis for
 determining the fair market value of the
 services rendered, and to permit indirect
 costs allocated to donated services to be
 charged to an agreement or used to meet
 cost sharing or matching requirements.
  4. Paragraph 13. Equipment and Other
 Capital Expenditures, was changed.
 Capital equipment is now defined as
 having an acquisition cost of $500 and a
 useful life of more than two years.
  5. Paragraph 24. Meetings,
 Conferences. The prior approval
 requirement for charging meetings and
 conferences as a direct cost was
 deleted. A sentence was added to make
 it dear such costs were allowable
 provided they meet the criterion for the
 allowability of cost shown in
 Attachment A.
  0. Paragraph 28, Organization Casts.
 was amended to provide that
 organization costs may be allowable
 when approved in writing by the
 awarding agency.
  7. Paragraph 28. Page Charges in
 Professional fournais, was revised to
 provide that page charges may be
 allowable.
  8. Paragraph 36. Public Information
 Service Costs, was modified to make
 public information costs allowable as
 direct costs with awarding agency
 approval.
  9. Paragraph 42, Rental Costs, was
 rewritten to:
  a. Make it dear that renta! costs
 under leases which create a material
 equity on the leased property are
 allowable only up to the amount that '.he
 organization would have been allowed
 had it purchased the property: e.g..
 depreciation or use allowances.
 maintenance, taxes, insurance, etc.
  b. Clarify the criteria for material
 equity leases.
  10. Paragraph' 50, Travel Costs, was
 amended to delete the prior approval
 requirement for domestic travel. In
 addition to the above., a number of
 editorial changes were made to the
 original document.

Suggested Changes Not Considered
Necessary.
  Comment. Several respondents
questioned the provision that, for "less
 than arm's length" leases,  rental costs
an allowable only up to the amount that
 would be allowed had title to the
 property been vested in the grantee
 organization. In their opinion this rule
 will result in unnecessary cost to the
Federal Government, since it would
encourage an organization to lease
space on the commercial market a! a
 higher rate.

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                      Fuderal Kngister  /  Vol. 45.  No. 132  /  Tuesday. July 8. 1980 / Notices
                                                                      46023
          e. Thu cost principles are
-designed to cover most situations:
 however, there are always exceptions
 that must be considered on a-case-by-
 case basis. The Circular contains a
.provision for FederaTagencies to request
 exceptions.
   Comment. Several respondents  ;
 questioned why interest is not an
 allowable cost, since it is an ordinary
 and necessary cost of doing business.
   Response. It has been a longstanding
 policy not to recognize interest as a cost.
 However, this policy has recently been
 revised for State and local governments
 in Circular 74-4. with respect to the cost
 of office space. The revision provides
 that "rental" rates for publicly owned
 buildings may be based on actual costs.
 including depreciation, interest,
 operation and maintenace costs, and
 other allowable costs. This revision was :
 under consideration for some time. It
 was studied extensively by OMB. the
 General Accounting Office and others,
 and considerable analysis went into its
 formulation. Suggestions for extending it
 to nonprofit organizations would have to
 be examined with equal care. This has
 not yet been done: and we were
 reluctant to further delay issuance of
 this Circular.                  < ,
  Comment. Several respondents
questioned why public information costs
were not allowable as an indirect cost.
  Response. Public information costs
are often direct services to an
organization's other programs. They are
allowable, however, as a direct charge
when they are within the scope of work
of a particular agreement.
  Comment. One respondent suggested
that smaller grantees be excluded from
complying with the Circular.
  Response. Similar rules for the 50
selected items of cost would be needed
regardless of the size of the grantee. To
the extent possible, the Circular
provides simplified methods for smaller
grantees.
  Comment. One respondent said the
requirements of the Cost Accounting
Standards Board should be applied to
cover contracts with nonprofit
organizations.
  Response. It is unlikely that the type
of grantees covered by this Circular
would have contracts large enough to be
covered by the CASH. In the event that
they do. however, the regulations of the
CASB would apply.
  Comment. One respondent said the
allocation of indirect cost to donated
services would'pose a tremendous
difficulty to the organization. The
organization relies on a corps of.
approximately 8.000 committee members
to carry out obligations in response to
Government requests. There is no
 employer relationship in the
 arrangements for this assistance, nor are
 there committee members normally
 reimbursed for such services. Further, it
 was pointed out the committee members
-spend many thousands of,hours outside
 the organization's premises conducting
 research.
   Response. It would appear that this
 type of committee arrangement would
 not be considered in the determination
 of the organization's indirect cost rate
 provided that Federal agreements do not
 bear an unreasonable share of indirect
 cost. However, the cognizant agency
 will be responsible for evaluating the
 allocation of indirect cost where there
 are committee-type arrangements on a
 case-by-case basis.
   Comment One respondent suggested
 that wherever possible the language in
 the Federal Procurement, Regulations be
 used for nonprofit organizations.
   Response. The language in the Federal
 Procurement Regulations was
 designated primarily for commercial .
 firms, and is not necessarily well suited
 to nonprofit organizations. At the
 suggestion of the General Accounting
 Office, the nonprofit cost principles
 were written to conform as closely as
 poaaible to those of educational
 institutions (Circular A-21). and State
 and local governments (Circular 74-4).
 lofao ], Lotdao,
 Chief. Financial Management Branch.

(Circular No. A-122]
fum 27.1980
  To The Heads of Executive
Departments and Establishments
  Subject: Cost principles for nonprofit
organizations. •
  1. Purpose. This Circular establishes
principles for determining costs of
grants, contracts and other agreements
with nonprofit organizations. It does not
apply to colleges and universities which
are covered by Circular A-21: State.
local,  and federally recognized Indian
tribal governments which are covered
by Circular 74-4: or hospitals. The
principles are designed to provide that
the Federal Government bear its fair
share of costs except where restricted or
prohibited by law. The principles do not
attempt to prescribe the extent of cost
sharing or matching on grants, contracts,
or other agreements. However, such cost
sharing or matching shall not be
accomplished through arbitrary
limitations on individual cost elements
by Federal agencies. Provision for profit
or other increment above cost is  outside
the scope of this Circular.
  2. Supersession. This Circular
supersedes cost principles issued by
 individual agencies for nonprofit
 organization.
   3. Applicability, a. These principles
 shall be used by all Federal agencies in
 determining the costs of work performed
 by nonprofit organizations under grants,
 cooperative agreements, cost
 reimbursement contracts, and other
 contracts in which costs are used in
 pricing, administration, or settlement.
 All of these instruments are hereafter
 referred to as awards. The principles do
 not apply to awards under which an
 organization is not required to account
 to the Government for actual costs
 incurred.
   b. All cost reimbursement subawards
 (subgrants. subcontracts, etc.) are
 subject to those Federal cost principles
 applicable to the particular organization
 concerned.  Thus, if a subaward is to a
 nonprofit organization, this Circular
 shall apply; if a subaward is to a
 commercial organization, the cost
 principles applicable to commercial
 concerns shall apply: if a subaward is to
 a college or university. Circular A-21
 shall apply; if a subaward is to a State.
 local, or federally recognized Indian
 tribal government Circular 74-4 shall
 apply-
   4. Definitions, a. "Nonprofit
 organization"means any corporation.
 trust, association,' cooperative, or other
 organization which (l) is operated
.primarily for scientific, educational.
 service, charitable, or similar purposes
 in the public interest; (2) is not
 organized primarily for profit: and (3)
 uses its net proceeds to maintain.
 improve, and/or expand its operations.
 For this purpose, the term  "nonprofit
 organization" excludes (i) colleges and
 universities; (ii) hospitals:  (iii) Stale.
 local, and federally recognized Indian
 tribal governments: and (iv) those
 nonprofit organizations which are
 excluded from coverage of this Circular
 in accordance with paragraph 5  below. —
   b. "Prior approvaJ" means securing
 the awarding agency's permission in
 advance to incur cost, for those items
 that are designated as requiring prior
 approval by the Circular. Generally this
 permission will be in writing.  Where an
 item of cost requiring prior approval is
 specified in the budget of an award.
 approval of the budget constitutes   •
 approval of that cost.
   5. Exclusion of some nonprofit
 organizations. Some nonprofit
 organizations, because of their size and
 nature of operations, can be considered
 to be similar to commercial concerns for
 purpose of applicability of cost
 principles. Such nonprofit organizations
 shall operate under Federal cost
 principles applicable to commercial
 concerns. A listing of these
                                                      -  34  -

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 46024
Federal Register /  Vol. 45. No. 132 / Tuesday.  July 6. I960 / Notices
 organizations is contained in
 Attachment C. Other organizations may
 be added from time to time.
 responsible for administering programs
 that involve awards to nonprofit
 organizations shall implement the
 provisions of this Circular. Upon
 request, implementing instruction shall
 be furnished to the Office of
 Management and Budget. Agencies shall
 designate a liaison official to serve as
 the agency representative on matters
 relating to the implementation of this
 Circular. The name and title of such
 representative shall be furnished to the
 Office of Management and Budget
 within 30 days of the date of this
 Circular.
   7. Attachments. The principles and
 related policy guides are set forth in the
 following Attachments:
   Attachment A— General Principles
   Attachment 8— Selected Items of Cost
   Attachment C— Nonprofit
 Organizations Not Subject to This
 Circular
   8. Requests for exceptions- The Office
 of Management and Budget may grant
 exceptions to the requirements of this
 Circular when permissible under
 existing law. However, in the interest of
 achieving maximum uniformity.
 exceptions will be permitted only in
 highly unusual circumstances.
   9. Effective Date. The provisions of
 this Circular are effective immediately.
 Implementation shall be phased in by
 Incorporating the provisions into new
 awards made after the start of the
 organization's next fiscal  year. For
 existing awards the new principles may
 be applied if an organization and the
 cognizant Federal agency agree. Earlier
 implementation, or a delay in
 implementation of individual provisions
 is also permitted by mutual agreement
 between an organization and the
 cognizant Federal agency.
   10. Inquiries. Further information
 concerning this Circular may be
 obtained by contacting the Financial
Management Branch. Budget Review
Division. Office of Management and
Budget, Washington. D.C 20503.
telephone (202) 395-4773.
lames T. Mctatyre, Jr..
Director.
[Circular No, A-J22J
AHachnent A
Table of Content*
A. Basic Considerations
1. Composition of total cost*
2. Factors affecting allowability of costs
3. Reasonable coats
4. Allocable costs
                    S. Applicable credits
                    6. Advance understandings
                    B. Direct Costs

                    C. Indirect Costs

                    D. Allocation of Indirect Costs and
                    Determination of Indirect Cost Rates
                    1. General
                    2. Simplified allocation method
                    3. Multiple allocation base method
                    4. Direct allocation method
                    S. Special indirect cost rates
                    E. Negotiation and Approval of Indirect Cost
                    Rates
                    1. Definitions
                    2. Negotiations and approval of rates
                    [Circular No. A-122]

                    Attachment A

                    General Principles

                    -4. Basic Considerations.
                     1. Composition of total costs. The total coit
                    of an award is the sum of the allowable
                    direct and allocable indirect costs less any
                    applicable credits.
                     2. Factors affscting allowabiiity of cost*.
                    To be allowable under an award, costs must
                    meet the following general criteria:
                     a. Be reasonable for the performance of the
                    award and be allocable thereto under these
                    principles.
                     b. Conform to any limitations or exclusions
                    set forth in these principles or in the award
                    as to types or amount of cost items.
                     c. Be consistent with policies and
                    procedures that apply uniformly to both
                    federally financed and other activities of the
                    organization.
                     d. Be accorded consistent treatment
                     e. Be determined in accordance with
                   generally accepted accounting principles.
                     f. Not be included as a cost or  used to meet
                    cost sharing or matching requirements of any
                   other federally financed program in either the
                   current or a prior period.
                     g. Be adequately documented.
                     3. Reasonable costs. A cost is reasonable
                   if. in its nature or amount, it does not exceed
                   that which would be incurred by • prudent
                   person under the circumstance! prevailing at
                   the time the decision was made to incur the
                   costs. The question of the reasonableness of
                   specific costs must be scrutinized with
                   particular can in connection with
                   organizations or separate divisions thereof
                   which receive the preponderance of their
                   support from awards made by Federal
                   agencies. In determining the 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 organization or the
                   performance of the sward.
                     b. The restraints or requirements imposed
                   by such factors as generally accepted sound
                   business practices, arms length bargaining.
                   Federal and State lawa and regulations, and
                   terms and conditions of the award.
                     c. Whether the individuals concerned acted
                   with prudence in the circumstances.
                   considering their responsibilities to the
                   organization, its members, employees, and
 clients, the public at large, and the
 Government.
   d. Significant deviations from the
 established practices of the organization
 which may unjustifiably increase the award
 costs.
   4. Allocable costs.
  •• a. A cost is sllocabie to a particular cos*
 objective, such as a grant, protect, service, or
 other activity, in accordance with the relative
 benefits received. A cost is ailocable to a
 Government award if it ia treated  "
 consistently with other costs incurred for :he
 same purpose in like circumstances and if:!:
   (1) Is incurred specifically for the award.
   (2) Benefits both the award and other worn
 and can be distributed in reasonable
 proportion to the benefits received, or
   (3) Is necessary to the overall operation of
 the organization, although a direct
 relationship  to any particular cost objective
 cannot be shown.
   b. Any cost allocable to a particular award
 or other cost objective unaer ma^e principles
 may not be shifted to other rscaral awards ;o
 overcome funding deficiencies, or to avoid
 restrictions imposed by iaw or oy che :erms
 of the award.
   S. Applicable credits.
   a. The term applicable credits refers to
 those receipts, or reduction of expenditures
 which operate to offset or reduce expense
 items that are allocable to awards as direct
 or indirect costs. Typical examples of such
 transactions are: purchase discounts, rebates
 or allowances, recoveries or indemnities on
. losses, insurance refunds, and adjustment* of
 overpayments or erroneous charges. To she
 extent that such credits accruing or received
 by the organization relate to allowable cost
 they shall be credited to the Government
 either as a cost reduction or cash  refund as
 appropriate.
   b. In some instances, the amounts receiveu
 from the Federal Government to finance
 organizational activities or service operations
 should be treated as applicable credits.
 Specifically,  the concept of netting such
 credit items against related expenditures
 should be applied by the organization in
 determining the rates or amounts  to.be
 charged to Federal awards for services
 rendered whenever the facilities or other
 resources used in providing such sen-ices
 have been financed directly, in whole or in
 part by-Federal funds. '
   (c) For rules covering program inccme
 (i.e.. gross income earned from federally
 supported activities) see Attachment O of
 OMB Circular A-110.
   0. Advance understandings. Under any
 given award the reasonableness and
 alienability of certain items of costs may be
 difficult to determine. This is particularly true
 in connection with organizations that receive
 a preponderance of their support from
 Federal agencies, in order to avoid
 subsequent disallowance or dispute based on
 unreasonableness or nonallocabitity. it is
 often desirable to seek a written agreement
 with the cognizant or awarding agency in
 advance of the incurrence of special or
 unusual costs. The absence of an  advance
 agreement on any element of cost will not, in
 itself, affect the reasonableness or
 alienability of that element.
                                                             _  35  _

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                          Federal  Register /  Vol.  45. No. 132 /  Tuesday,  fuly 8. 1980/Notices
                                                                                  46025
  8. Direct Costs
    1. Direct costs are those that can be
  identified specifically with a particular final
  cost objective: i.e.. a particular award.
  project, service, or other direct activity of an
  organization. However, a coit may not be
  assigned to an award as a direct coit if any
  other cost incurred for the same purpose, in
  like circumstances, has-been allocated  to an
  iiwitrd us an indirect cost. Costs identified '
  specifically with awards are direct costs of '
  ihr awards and are to be assigned directly
  thereto. Costs identified specifically with
  other final cost objectives of the organization
  Art direct costs of those cost objectives and
  are nut to be assigned to other awards
  directly or indirectly.
    2. Any  direct cost of a minor amount  may
  be treated as an indirect cost for reason* of
  practicality where the accounting treatment
  for such cost is consistently applied to alt'
  final cost objectives.
    3. The cost of certain activities are not
  allowable as charges to Federal awards (see.
 _.for example, fund raising costs in paragraph
  19 of Attachment B). However, even though
  these costs are unallowable for purposes of
  computing charges to Federal awards, they
  nonetheless must be treated as direct cost for
  purposes of determining indirect cost rates
  and-be allocated their share of the
  organization's indirect costs if they represent
  activities which (1) include the salaries of
  personnel. (2) occupy space, and (3) benefit
  from the organization's indirect costs.  -
   4. The costs of activities performed
  primarily  as a service to members, clients, or
  the general public when significant and
  necessary to the organization's mission must
  be treated as direct costs whether or not
  allowable and be allocated an equitable
  share of indirect costs. Some examples of
  these types  of activities include:
    a. Maintenance of membership rails.
  subscriptions, publications, and related
  functions.                        ,
   b. Providing services and information to
  members, legislative or administrative
  bodies, or the public.
   c. Promotion, lobbying, and other forms of
  public relations.
   d. Meetings and conferences except those
  held to conduct the general administration of -.
  the organization.
   3. Maintenance, protection, and investment
  of special funds not used in operation of the •
  organization.                       •  .
   f. Administration of group benefits on
  behalf of members or clients including life
  and hospital insurance, annuity or retirement
  plans, financial aid. etc.

 C. indirect Cost.
   1. Indirect costs are those that have been   •
 incurred for common or joint objectives and
 cannot be readily identified with a  particular.
. final cost  objective. Direct cost of minor
 amounts may be treated as indirect costs"'-' ••'
 under the  conditions described in paragraph
 B.2. above. After direct costs have been
 determined and assigned directly to awards '
 or other work as appropriate, indirect coals
 are those remaining to be allocated to .
 benefiting cost objectivesJA cost may not be
 allocated  to  an award as an indirect coal if
 any other cost incurred for the same purpose.
  in like circumstances, has been assigned to  .
  an award as a direct cost.
    2. Because of the diverse characteristics.  .
  and accounting practices of nonprofit
  organizations, it is not possible to specify the
  types of costs which may be classified as
  indirect cost in all situations. However.      -
  typical examples of indirect cost for many
  nonprofit organizations may include
  depreciation or use allowances on buildings
  and equipment the costs of operating and
  maintaining facilities, and general
  administration  and general expenses, such as
  the salaries and expenses of executive
  officers, personnel administration, and
 'accounting.

  D. Allocation of Indirect Costs and
  Determination of Indirect Cost Rates.
    1. General.
    a. Where a nonprofit organization has only
  one major function, or where  all its major
  functions benefit from its indirect costs to
  approximately the sane degree, the
  allocation of indirect costs and the
  computation of an indirect cost rate may be
  accomplished through simplified allocation
  procedures as described in paragraph 2
  below.
   b. Where an organization has several major
  functions which benefit from  its indirect costs
•  in varying degrees, allocation of indirect
  costs may require the accumulation of such
  costs into separate cost groupings which then
  are allocated.individually to benefiting
  functions by means of a base  which best
,  measures the relative degree of benefit. The
  indirect coats 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. The determination of what constitutes an
 organization's major functions will depend on
 its purpose in being; the types of services it . .
 renders to the public, its clients; and its
 members: and the amount of effort il devotes
 to such activities as fund raising, public
 information and membership  activities.
   d. 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 paragraphs Z
 through S below.
   e. The base period for the allocation of
 indirect costs is the period in  which such
 costs an incurred and accumulated for
 allocation to work performed  in that period.
 The base period normally should coincide
 with the organisation's fiscal  year, but in any
 event shall be so selected as  to avoid
 inequities in the allocation of  the costs.
   2. Simplified allocation method.
   a. Where an organization's  major functions
 benefit from its  indirect costs  to
 approximately the same degree, the
 allocation of indirect costs may be '    :
 accomplished by (i) separating the '
 organization's total costs for the base period
 as either direct or indirect, and fii) 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 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 an organization has only one major  .
 function encompassing a number of
 individual projects or activities, and may be
 used where the level of Federal awards to an
 organization is relatively small.
   b. Both the direct costs and the indirect
 costs shall exclude capital expenditures and
 unallowable costs. However, unallowable
 costs which represent activities must be
 included in the direct costs under the
 conditions described  in paragraph B.3. above.
•   c. The distribution base may be total direct
 costs (excluding capital expenditures and
 other distorting items, such as major
 subcontracts or subgrants). direct salaries
 and wages, or other base which results in an
 equitable distribution. The distribution base '
 shall generally exclude participant support
 costs as defined-in paragraph 29 of
 Attachment B.
   d. Except where a special rate(s) is
 required in accordance  with paragraph O.5
 below, the indirect cost rate develocwd under
 the above principles is applicable to aii
 •t wards at the organization. If a special
 rate{s) is required, appropriate modifications  -
 shall be made in order to develop the special
 rate(s).
   3. Multiple allocation base method.
   a. Where an organization'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 benefiting functions
 by means of a base which best measures the
 relative benefits.
   b. The groupings shall 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, talcing into consideration the
 materiality of the amounts involved and the
 degree of precision desired.'
   c. Actual conditions must be taken into
 account in selecting the base to be used in
 allocating the expenses in each grouping to
 benefiting 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 Government  and the organization, in
 general any cost element or cost related
 factor associated with the organization's
 work is potentially adaptable for.use as an -
 allocation base provided (i) it can readily be
 expressed in terms of dollars or other •
 quantitative measures (total direct costs.
 direct salaries and wages, staff hours applied.
 square feel used, hours of usage, number of
 documents processed, population served, and
 the like) and (ii) it is common to the
 benefiting functions during the base period.
  d Except where a special indirect cost
 rate(s) ia required in accordance with
                            i
               -  36 -

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 46028
Federal  Regbjer / Vol. 45. No. 132 /  Tuesday. July  8.  1980  / Notices
           IJ.S fielow >hir nt;f>am\tt
 <,t inrlirm.l' i>«U allof.iitittl to <:;ir;h mdjor
 (ufit.tiim shall be aggregutKd and treated as»
 common pool for thai function. The costs in
 Iht common pool shall then be distributed to
 individual 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 total direct costs (excluding capital
 expenditures and other distorting items such
 as major subcontracts and subgrants), direct
 salaries and wages, or other base which
 results in an equitable distribution. The
 distribution base shall generally exclude
 participant support costs as defined in
 paragraph 29. Attachment B. An indirect cost
 rale should be developed for each separate
 indirect cost pool developed. The rate in each
 case should be slated as the percentage
 which the amount of the particular indirect
 cost pool is of the distribution base identified
 with that pool
   4. Direct allocation  method.
   a. Some nonprofit organizations, treat all
 costs as direct costs except general
 administration and general expenses. These
 organizations generally separate their costs
 into three basic categories: (i) General
 administration and  general expenses, (ii)
 fund raising,  and (iii) other direct functions
 (including protects performed under Federal
 awards), joint costs, such as depreciation,
 rental costs, operation and maintenance of
 facilities, telephone expenses, and the like
 are prorated individually as direct costs to
 each category and to each award or other  •
 activity using a base moat appropriate to the
 particular cost being prorated.
   b. This method is acceptable provided each
 joint cost is prorated using a base which
 accurately measures the benefits provided to
 each award or other activity. The bases-must
 be established in accordance with reasonable
 criteria, and be supported by current data.
 This method is compatible with the
 Standards of Accounting and Financial
 Reporting for Voluntary Health and Welfare
 Organizations issued jointly by the National
 Health Council. Inc. the National Assembly
 of Voluntary Health and Social Welfare
 Organizations, and the United Way of
 America.
  c. Under this method, indirect costs  consist
 exclusively of general administration and
 general expenses. In ail other respects, the
 organization's indirect coat rates shall be
 computed in the same manner as that
 described in paragraph D-2 above.
  5. Special indirect cost rotas. In some.
 instances, a single indirect coat rale for all
activities of an organisation or for each major
function of the organization may not be
appropriate, since it would not take into
account those different factors which may
substantially affect the indirect costs
applicable to a particular segment of work.
For this purpose, a particular segment  of
work may be that performed under a single
award or it may consist of work under a
group of awards performed in a common
environment. 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
scientific disciplines or technical skills
 involved, the organizational arrangements
 used, or any combination thereof. When a
 particular segment of work is performed in an
 environment which appears to generate a
 significantly different level of indinct costs.
 provisions should be made for a separate
 indirect cost pool applicable to such work.
 The separate indinct cost pool should be
 developed during the'course of the regular
 allocation process, and the separata indinct
 cost rate resulting therefrom should be used
 provided it is determined that (i) the rate
 differs significantly from that which would
 have been obtained under paragraph 0.2.3,
 and 4 above, and (ii) the volume of work to
 which the rate would apply is material.

 £ Negotiation and Approval of Indirect Cost
 Kates.
   1. Definitions. As used in this section, the
 following terms have the meanings set forth
 below:
   a. "Cognizant agency" means the Federal
 agency  responsible for negotiating and
 approving indirect cost rates for a nonprofit
 organization on behalf of ail Federal
 agencies.
   b. "Predetermined rate"  means an indinct
 cost rate, applicable to a specified current or
 future period, usually the organization's fiscal
 year. The rate is based on an estimate of the
 costs to be incurred during the  period. A
 predetermined rate is not subject  to
 adjustment
  c. "Fixed rate" means an indinct cost rate
 which has the same characteristics as a
 predetermined rate, except that the difference
 between the estimated costs and the actual
 costs of the period covered by the rate is
 carried forward as an adjustment to the rate  '
 computation of a subsequent period.
  d. "Final rale" means an indinct cost rat*
 applicable to a specified past period which  is
 based on the actual costs of the period. A
 final rate is not subject to adjustment
  e. "Provisional rate" or billing rate means a
 temporary indirect cost rale applicable to a
 specified period which is used for funding,
 interim reimbursement and reporting indirect
 costs on awards pending the establishment  of
 a final rale for the period.
  f. "Indinct cost proposal" means the
 documentation prepared by an  organization
 to substantiate its claim for the
 reimbursement of indinct costs. This
 proposal provides the basis for the review
 and negotiation leading to the establishment
 of an organization's indirect cost rate.
  g. "Cost objective" means a function.
organizational subdivision, contract grant or
other work unit for which coat data an
desired and for which provision is made to
accumulate and measure the cost of
processes, projects, jobs and capitalized
projects.
  2. Negotiation and approval of rate*.
  a. Unless different arrangements an
agreed to by the agencies concerned, the
Federal agency with the largest dollar value
of awards  with an organization will be
designated as the cognisant agency for the
negotiation and approval of indirect coal
rates and. when necessary, other rates such
as fringe benefit and computer charge-out
rates. Once an agency is assigned cognizance
for a particular nonprofit organization, the
                                                                assignment will not be changed unless there
                                                                is a major long-term shift in the dollar volume
                                                                of the Federal awards to the organization. All
                                                                concerned Federal agencies shall be given the
                                                                opportunity to participate in the negotiation
                                                                'process, but after a rate has been agreed
                                                                upon it will be accepted by all Federal
                                                                agencies. When a Federal agency has reason
                                                                to believe that special operating factors
                                                                affecting its awards necessitate special
                                                                indinct cost rates in accordance with
                                                                paragraph D.S above, it will, prior to the time
                                                                the rates an negotiated, notify the cognizant
                                                                agency.
                                                                  b. A nonprofit organization which iias noi
                                                                previously established an indirect cost rate
                                                                with a Federal agency shall submit its initial
                                                                indinct cost proposal to the cognizant
                                                                agency. The proposal shall be submitted as
                                                                soon as possible after the organization is
                                                                advised that an award will be made and. in
                                                                no event, later than three months after 'he
                                                                effective date of the award.
                                                                  c. Organizations that have previously
                                                                established indirect cost rates must submit a
                                                                new indinct cost proposal to the cognizant
                                                                agency within six months after the ciose at
                                                                each fiscal year.
                                                                  d. A predetermined rate may be negotiated
                                                                for use on awards when then is reasonable
                                                                assurance, based on  past experience and
                                                                reliable projection of the organization's coats.
                                                                that the rate is not likely to exceed a rate
                                                                based on the organization's actual costs.
                                                                  e. Fixed rates may be negotiated where
                                                                predetermined rates an not considered
                                                                appropriate. A fixed rate, however, shall not
                                                                be negotiated if (i) all or a substantial portion
                                                                of the organization's awards are expected to
                                                                expire before the carry-forward adjustment
                                                                can be made: (ii) the mix of Government and
                                                                non-government work at the organization is
                                                                too erratic to permit an equitable carry-
                                                                forward adjustment: or (iii) the organization's
                                                                operations fluctuate significantly from year *o
                                                                year.
                                                                  f. Provisional and final rates shall be
                                                                negotiated when neither predetermined nor
                                                                fixed rates an appropriate.
                                                                  g. The results of each negotiation shall be
                                                                formalized in a written agreement between
                                                                the cognizant agency and the nonprofit
                                                                organization. The cognizant agency shall
                                                                distribute copies of the agreement to all
                                                                concerned Federal agencies.
                                                                  h. If a dispute arises in a negotiation of an
                                                                indirect cost rate between the cognizant
                                                                agency and the nonprofit organization, the
                                                                dispute shall be resolved in accordance with
                                                                the appeals procedure* of the cognizant
                                                                agency.
                                                                  i. To the extent that problems are
                                                                encountered among the Federal agencies in
                                                                connection with the negotiation and approval
                                                                process, the Office of Management and
                                                                Budget wilt tend assistance as required to
                                                                nsolve such problems in a timely manner.
                                                                (Circular No. A-122)
                                                               Selected Ram of Coat

                                                               Table of Contents
                                                               1. Advertising costs
                                                               2. Bad debt*
                                                               3. Bid and proposal costs (reserved)
                                                            37

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                          Federal  tester /  Vot. 45.  No.  132  /  Tuesday. July v. 1980 / Notices
                                                                                46027
   4. Bonding cost*
   5. Communication costs
   8. Compensation for personal services
   7. Contingency provisions
   8. Contributions
   9. Depreciation and use allowances
   10. Donations          •     '  :;    •  .' •'
   11. Employee morale, health and welfare -
      costs and credit*
   11 Entertainment coats    .         .
   13. Equipment and other capital expenditures
  • 14. Fines and penalties      ;         .  -
   15. Fringe benefits
   16. Idle facilities and idle capacity
   17, Independent research and development
      (reserved)                ,      .
   18. Insurance and indemnification
   19. interest, fund raising, and investment
      management costs
   20. Labor relations costs
   21 .'Losses on other a wards  .         .   ".
   22. Maintenance and repair costs    .- •   ,.
   23. Materials and supplies
   24. Meetings, conferences                  -,
   25; Memberships, subscriptions, and       . •
      professional activity costs
   26. Organization costs        1    ,
   27. Overtime, extra-pay shift, and multiahift.'
      premiums
   28. Page charges in professional journals
  29. Participant  support costs
  30. Patent costs
  31. Pension plans          -             -
  32. Plant security costs
  33. Preawerd costs
  34. Professional service costs
  35. Profits and losses on disposition of   .
     depreciable property or other capital
     assets
  36. Public information service costs
  37. Publication and printing coats
  38. Rearrangement and alteration costs
  39. Reconversion costs
  40. Recruiting costs
  41. Relocation costs      .     ,
  42. Rental costs .
 . 43. Royalties and other costs for use of •
     putents and copyrights
  44. Severance pay
  45. Specialized service facilities   .
  4«. Taxes                          /••   ^
  47. Termination costs
,  48. Training and education costs
  49. Transportation costs •
  50. Travel costs -          ".-"••
  [Circular No. A-122]             •    •

  Attachment B                      '  '

  Selected items of Cost               '
   Paragraphs 1 through 50 provide principles' •
  to be applied in establishing the allowability
  of certain items of cost. These principles
  apply whether a cost is treated as direct or
  indirect. Failure to mention a particular item
  of cost is not intended to imply that it is
.  unallowable: rather determination as to.
  allowability in each case should be based on
  the treatment or principles provided for
  similar or related items of cost.
   1. Advertising costs.
   a. Advertising costs mean the costs of
  media services and associated costs. Media
  advertising includes magazines, newspapers..
  radio and  television programs, direct mail..
 exhibits, and the like.
    b. The only advertising costs allowable are
  those which are solely for (i) the recruitment
  of personnel when considered in conjunction
  with all other recruitment costs, as set forth
  in paragraph 4ft (ii) the procurement of goods
  and services: (iii) the disposal of surplus  •
  materials acquired in the performance of the
  award except when organizations an
  reimbursed for disposals at a predetermined '
  amount in accordance with Attachment N of *
  OMB Circular A-llft or (iv) specific
  requirements of the award.
    i Bad debts. 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. Bid and proposal emit,  (reserved)
  •  4. Bonding coats. '                       •
   " a. Bonding costs arise when the
  Government requires assurance against
-:- financial loss to itself or others by reason of
  the act or default of the  organization. They .
  •arise also in instances where the organization
  requires similar assurance. Included are such
  bonds as bid performance, payment.
  advance payment, infringement, and fidelity ,
  bonds.
    b. Costs of bonding required pursuant to
  the terms of the award are allowable.
    c. Costa of bonding required by the
  organization in the general conduct of its -
 .operations are allowable to the extent that
  such bonding is in  accordance with sound
  business practice and the rates and premiums
  are reasonable under the circumstances.
   •5. CootntuRKOtion costs. Costa incurred for
•  telephone services, local and long distance
<  telephone calls, telegrams, radiograms,
  postage and the like, an allowable.
   b. Compensation for personal services, ••
 • a. Definition. Compensation for personal
•services includes all compensation paid
  currently or accrued by the organization for
  services of employees rendered during the
  period of the award (except as otherwise
  provided in paragraph g. below). It includes.
  but is not limited to. salaries, wages.
  director's and executive committee member's
  fees, incentive awards, fringe benefits.
  pension plan costs, allowances for off-site
  pay, incentive pay, location allowance*.
  hardship pay. and cost of living differentials.
   b. Allowability. Except as otherwise
  specifically provided in  this paragraph, the
 costs of such compensation an allowable to
 the extent that:             •
   (1) Total compensation to individual
 employees is reasonable for the services
 rendered and conforms to the established
 policy of the organization consistently
 applied to both Government and non-
 Government activities; and
   (2) Charges to awards  whether treated as .
 direct or indirect coats an determined and
 supported as required in this  paragraph.
   c. Reasonableness.
•'   (1) When the organization ia predominantly
 engaged in activities other than those
 sponsored by the Government compensation
 for employees on Government-sponsored
 work will bo considered  reasonable to the.
 extent that it is consistent with that paid for
.similar work in the  organization's other     •
activities.
   (2) When the organization is predominantly
engaged in Government-sponsored activities
  and in cases where the kind of employees
  required for the Government activities are -
  not found in the organization's other •
  activities, compensation for employees on
  Government-sponsored work wiU be
  considered reasonable to the extent that it is
  comparable to that paid for similar work in  - .
  the labor markets in which the organization
  competes for the kind of employees involved.'
 •:. d. Special considerations in determining
  allowability. Certain conditions require
  special consideration end possible  limitations
  in determining costs under Federal  awards
  when amounts or types of compensation
  appear unreasonable. Among such conditions
  are the following;  •
    (1) Compensation to members of  nonprofit
  organizations, trustees, directors, associates.
  officers, or the immediate families thereof.  .
  Determination should be made that such
  compensation is reasonable, for the  actual
  personal services rendered rather than a
  distribution of earnings in excess of costs.
   (2) Any change in an organization's
  compensation policy resulting in a
  substantial increase in the organization's
  level of compensation, particularly when it   .
  was concurrent with an increase in  the ratio
.  of Government awards to other activities of
  the organization or any change in the
  treatment of allowability of specific types of
  compensation due  to changes in Government
  policy.
   e. Unallowable cost*. Costs which are
• unallowable under other paragraphs of this
  Attachment shall not be allowable under this"
  paragraph solely on the basis that they
 constitute personal compensation.
   I Fringe benefits.
   ft) Fringe benefits in the form of regular
 compensation paid to employees during
 periods of authorized absences from the job.
 such as vacation leave, sick leave, military
 leave, and the like, are allowable provided
 such costs on absorbed by all organization
 activities in proportion to the relative amount'
 of time or effort actually devoted to  each.
   (2) Fringe benefits in the form of employer
 contributions or expenses for social  security,
 employee insurance, workmen's
 compensation insurance, pension plan costs
 (see paragraph g. below), and the like, are
 allowable provided such benefits are granted
 in accordance with established  written
 organization policies. Such benefits whether
 treated as indirect costs or as direct costs.
 shall be distributed to particular awards and
 other activities in a manner consistent with
 the pattern of benefits accruing  to the
 individuals or group of employees whose
-salaries and: wages are chargeable to such
 awards and other activities.
   (3)(a) Provisions for a reserve under a self-
 insurance program for unemployment
 compensation or workers' compensation are  '
 allowable to the extent that the provisions
 represent reasonable estimates of the
 liabilities for such compensation, and the
 types of coverage, extent of coverage, and
 rates and premiums would have been
 allowable had insurance been purchased to
 cover the risks. However, provisions for self-
• insured liabilities which do not become
- payable for more than one year  after t he
 provision is made shall not exceed the
 present value of the liability.
                                                            38

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   48(08
Federal Register  / Vol.  45,  No.  132  / Tuesday, July  a,  1980 / Notices
    (b| Where an organization foliowi a
  coniiitent policy of expensing actual
  payments to. or on behalf of, employee* or
  former employees for unemployment
  compensation or worker*' compensation.
  such payments are allowable in the year of.
  payment with the prior approval of the
  awarding agency provided they are allocated
  to all actlvltiea of the organization.
    (4) Costa of insurance on the lives of
  trustees, officers, or other employees holding
  positions of similar responsibility an
  allowable only to the extent that the .
  insurance represents additional
  compensation. The costs of such insurance
  when the organization is named as
  beneficiary are unallowable.
    g. Pennon plan cost*.
    (1) Costs of the organisation's pension plan
  which are incurred in accordance with the,
  established policies of the organization an
  allowable, provided?
    (a) Such policies meet the lest of
  reasonableness:
 •   (b) The methods of. cost allocation an not
  discriminatory;
    (c) The cost assigned to each fiscal year is
  determined in accordance with generally
  accepted accounting principles  as prescribed
  in Accounting Principles Board Opinion No. B
  issued by the American institute of Certified
  Public Accountants: and
    (d) The costs assigned to a given fiscal year
  an funded for all plan participants within six
  months after the end of that year. However..
  incnases to normal and past service pension
  costs caused by a delay in funding the
  actuarial liability beyond 30 days after each •
  quarter of the year to which such costs an
  assignable an unallowable..
   (2) Pension plan termination insurance
  premiums paid pursuant to the Employe*
  Retirement income Security Act of 1974 (Pub.
  L. 93-400) are allowable. Late payment
  charges on such premiums are unallowable.
   (3) Excise taxes on accumulated funding
  deficiencies and other penalties imposed
  under the Employee Relinment Income
  Security Act an unallowable.
   h. Incentive compeatation. Incentive
  compensation to employees baaed on coat
  reduction, or efficient performance.
  suggestion awards, safety awards, etc.. an
 allowable to the extent that the overall
 compensation is determined to be reasonable
 •nd such costs an paid or accrued pursuant
 to an agreement entered into in  good faith
 between the organisation and the employees
 before the services wen rendered, or
 pursuant  to an established plan followed by
• the organisation so consistently as to imply.
 in effect, an agreement to make such
 payment
   i. Overtime, extra pay shift, and maltithift
 premium*. See paragraph 27.
  ' j. Severance pay. See paragraph 44.
   k.  Training and education costs. See
 paragraph 4»
   1. Support of salaries and wage*.
   (l) Charges to awards for salaries and
 wages, whether treated aa direct costs or
 indirect costs, will be based on documented
 payrolls approved by e responsible officials)
 of the organization. The distribution of
 salaries and wages to awards must be
 supported by personnel activity reports as
                    prescribed in subparagraph (2) below, except
                    when a substitute system has been approved
                    in writing by the the cognisant agency. {See
                    paragraph E2 of Attachment A)
                     (2) Reports reflecting the distribution of
                    activity of each employee must be
                    maintained for all staff members
                    (professionals and nonprofasskmals} whose
                    compensation is charged, in whole or in pan.
                    directly to awards. In addition, in order to
                    support me allocation of indirect costs, such
                    reports must also be maintained for other
                    employees whose work involves two or more
                    functions or activities if a distribution of their
                    compensation between such functions or
                    activities is needed in the determination of
                    the organization's indirect cost raters) (*.g~
                    an employee engaged part-time in indirect
                    cost activities and part-time in a direct
                    function). Reports maintained by nonprofit
                    organisations to satisfy these requirements
                    must meat the following standards:
                     (a) The reports must reflect an after-the-
                    fact determination of the actual activity of
                    each employee. Budget estimates (i.e..
                    estimates determined before the services an
                    performed) do not qualify as support for
                    charges to awards.
                     (b) Each report must account for the total
                    activity for which employees an   ;
                    compensated and which is required in
                    fulfillment of their obligations to the  '
                    organization.
                     (c) The reports must be signed by the
                    individual employee, or by a responsible
                    supervisory official having first hand   . .
                    knowledge of the activities performed by the
                    employee, that the distribution of activity
                    represents a reasonable estimate of the
                    actual work performed by the employee
                    during the periods covered by the reports.
                     (d) The reports mast be prepared at least
                    monthly and must coincide with one or more
                    pay periods.
                     (3) Charges for the salaries and wages  of
                    nonprofessional employees, in addition to the
                    supporting documentation described in
                    sufaparagrapha (I) and (2) above, must also
                    be supported by records indicating the total
                    number of hours worked each day
                    maintained in conformant* with Department
                    of Labor regulations implementing the Fair
                    Labor Standards Act (29 CFR Part 516). For
                    this purpose, the term "nonprofessional
                    employee" shall have the same meaning aa
                    "nonexempt employee." under the Fair Labor .
                    Standards Act
                     (4) Salaries and wages of employees used
                    in meeting coat ^"""g or
                   requirements on awards must be supported in
                   the same manner aa salaries and wages
                   claimed for reimbursement from awarding
                   agendas.
                     7. Contingency pro vision*. Contributions to
                   a contingency reserve or any similar
                   provision made for events the occurrence of
                   which cannot be foretold with certainty aa to
                   time, intensity, or with an assurance of their
                   happening, an unallowable. The term
                   "contingency rasanre" excludes self*
                   insurance reserves (sea paragraph 8,f.(3) and
                   18.a.(2)(d)); pension funds (sea paragraph
                   Q.(g)|; and reserves for normal severance pay
                   (see paragraph 44.(b){i).
                     8. Contribution*. Contributions and
                   donations by the organization to others are
                   unallowable.4
    9. Depreciation and use allowance*.
    a. Compensation for the use of buildings.
  other capital improvements, and equipment
  on hand may be mad* through us*
  allowance* or depreciation. However, except
  as provided in paragraph f. below a
  combination of lha two methods may not be
  used in connection with a single class of
  fixed assets (e.g.. buildings, office equipment.
  computer equipment, etc.).
    b. The computation of use allowances or
  depreciation shall be based on the
  acquisition cost of the assets involved. The   '
  acquisition cost of an asset donated to the
  organization by a third party shall be its lair
  market value at the time of the donation.
    c. The computation of use allowances or
  depreciation 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; and
    (3) Any portion of the cost of buildings and
  equipment contributed by or for the
  organization in satisfaction of a statutory
  matching retirement.
    d. Where the us* allowance method is
  followed, the use allowance for buildings and
  improvement (including land improvements
 . such as paved parking areas, fences, and
  sidewalks) will b* computed at an annual
  rate not exceeding two percent of acquisition
  cost The use allowance for equipment will
  be computed at an annual rate not exceeding
  six and two-thirds percent of acquisition cost.
  When the us* 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
  conditioning, 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, carpeting, etc.). Such
 equipment will be considered a* not being
 permanently fixed to the  building if. it can be
 removed without the need for costly or
 extensive alterations or repairs to the
 building or the equipment. Equipment that
 meets these criteria will be subject to the six
 and two-thirds percent equipment use
 allowance limitation.
   e. Where 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 a* type of construction, nature of the
 equipment used, technological developments
 in the particular program ana. and the -
. nnewal and replacement policies followed
 for the the individual items or classes of
 assets involved. The method of depreciation
 used to assign the cost of an asset (or group
 of assets) to accounting periods-shall reflect
 the pattern of consumption of the asset
 during its useful life.  In the absence of clear
 evidence indicating that the expected
 consumption of the asset will be significantly
 greater or lesser in the early portions of us
                                                           —  39  -

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                         Federal Ragistar  /  Vol.  45. No. 132 / Tuesday. July &  1980  / Notices
  useful tiltr !h»n in lh» lal*r portion*, 'the
  *ir
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 46030
Federal Register / Vol. 45, No. 132 / Tuesday,  July 8. 1980 / Notices
   ft) "Facilities" mttim land xnd buildings or
 any portion thereof, equipment individually
 or collectively, or any other tangible capital
 asset, wherever loaned, and whether owned
 or leased by ihe organization.
   (2) "Idle facilities" means completely
 unused facilities that are excess to the
 organization's current needs.
   (3) "Idle capacity" means the unused
 capacity of partially used facilities/It is the
 different* between that which a facility
 could achieve under 100 per cent operating
 time on a one-shift basis less operating
 interruption* resulting from lime lost SOT
 repairs, setups, unsatisfactory materials, and
 other normal delays, and the extent to which
. the facility was actually used to meet
 demands during the accounting period. A
 multishift basis may be used if it can be
 shown that this amount of usage could
 normally be expected for the type of facility
 involved.
   (4) "Costs of idle facilities or idle capacity" •
 means costs such as maintenance, repair.
 housing, rent, and other related costs: e.g..
 properly taxes, insurance, 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: or
   (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 aot have been
 reasonably foreseen. Under the exception
 slated in this subparagraph. costs of idle
 facilities are allowable  for a reasonable
 period of time, ordinarily not to exceed one
 year, depending upon the initiative taken to
 use, lease, or dispose'of such facilities (but
 see paragraphs 47.o. and d.).
   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 an
 allowable, provided the capacity is
 reasonably anticipated  to be necessary or
 was originally reasonable and is not subject
 to reduction or elimination by subletting,
 renting, or sale, in accordance with sound
 business, economics, or security practices.
 Widespread idle capacity throughout an
 entire facility or among a group of assets
having substantially the same function may
be idle facilities.
   17. Independent research and development
(Reserved!.
   18. Insurance and indemnification.
   a. Insurance includes insurance which the
organization ia required to cany, or which is
approved.' under the terms of the award and
any other insurance which the organization
maintains in connection with the general
conduct of its operations. This paragraph
does not apply to insurance which represents
fringe benefits for employees (see paragraph
e.f.8nd6.g.(2J).
   (1) Cost* of insurance required or
approved, and maintained, pursuant to the
award  are allowable.
   (2) Costs of other insurance maintained by
Ihe organization in connection with the
                    general conduct of its operations are
                    nllowable subject to the following limitations.
                      (u) Types and extent of coverage shall be
                    in accordance with sound business practice
                    and the rates and premiums shall be
                    reasonable under the circumstances.
                      (b) Costs allowed for business Interruption
                    or other similar insurance shall be limited to
                    exclude coverage of management fees.
                      (c) Costa of insurance or of any provisions
                    for a reserve covering the risk of loss or
                    damage to Government property are
                    allowable only to the extent that the
                    organization is liable for such loss or damage.
                      (d) Provisions for a reserve under a self-
                    insurance program an allowable to the
                    extent that types of coverage, extent of
                    coverage, rates, and premiums would have
                    been allowed had insurance been purchased
                    lo 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 present value of
                    the liability.
                      (a) Costs of insurance on the lives of
                    trustees, officers, or other employees holding
                    positions of similar responsibilities are
                    allowable only  to the extent that the
                    insurance represents additional
                    compensation (see paragraph 6). The cost of
                    such insurance when the organization ia
                    identified as the beneficiary is unallowable.
                      (3) Actual losses which could have been
                    covered by permissible insurance (through
                    the purchase of insurance or a self-insurance
                    program) are unallowable unless expressly
                    provided for in  the award, except: •
                      (a) Coats incurred because of losses not
                    covered under nominal deductible insurance
                    coverage provided in keeping with sound
                    business practice are allowable.
                      (b} Minor loaaes not covered by insurance.
                    such aa spoilage, breakage, and
                    disappearance of supplies, which occur ia the
                    ordinary course of operations, are allowable.
                      b. Indemnification includes securing the
                    organization against liabilities to third
                    person* and any other loas or damage, not
                    compensated by insurance or otherwise. The
                    Government is obligated to indemnify the
                    organization only to the extent expressly
                    provided in the award.
                      19. Interest. fluid re/ring, and ianttmmt
                     a. Costs incurred: for interest on bonowed
                    capital or temporary use of endowment
                    fund*, however represented, are unallowable.
                     b. Costs of organized fund raising,
                    including financial campaigns, endowment
                    drive*, solicitation of gift* and bequests, and
                    similar expenses incurred solely to raise
                    capital or obtain contributions are
                    unallowable.
                     c- Cost* of investment counsel and staff
                    and similar expenses incurred solely to
                    enhance income from investments an
                    unallowable.
                     d. Fund raiting and investment activities
                    shall be allocated an appropriate share of
                    indirect cost* under the condition* described
                    in paragraph B of Attachment A,
                     20. Labor relation* cost*. Costs incurred in
                    maintaining satisfactory relation* between
                    the organization and it* employee*, including
                    costs of labor management committee*.
 employee publications, and other reluted
 activities ore allowable.
   21. IMUBS on other award*. Any excuss of
 cost* over Income on any award is
 unallowable a* a cost of any other award.
 This include*, but is not limited lo, the
 organization's contributed portion by reason
 of cost sharing agreements or any
 underrecoverie* through negotiation of lump
 sum* for. or ceiling* on, indirect colts,
   22. Maintenance and repair cottt. Costs
 incurred for necessary maintenance, repair.
 or upkeep of buildings and equipment
 (including Government 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. Costs incurred for improvements
 which add to the permanent value of the
 building* and equipment or appreciably
 prolong their intended life snail be treated as
 capital expenditure* (see paragraph 131-
   23. Materials and supplies. The costs of
 materials and supplies necessary to carry out
 an award are allowable. Such cost* should be
 charged at their actual price* after deducting
 all cash discounts, trade discounts, rebates.
 and allowance* received by the organization.
 Withdrawals from general store* or
 stockrooms should be charged at cost under
 any recognized method of pricing
 consistently applied. Incoming transportation
 charges may be a proper part of material
 coat Material* and supplies charged a* a
 direct cost should include only the materials
 and supplies actually used for the
 performance of the contract or grant, and due
 credit should be given for any excess
 materials or supplies retained, or returned to
 vendor*.
  24. Meetings, conferences.
  a. Co*t* associated with the conduct of
 meetings and conferences, include the cost of
 renting facilities, meal*, speakers' fees, and
 the like, But see paragraph 12. Entertainment
costs, and paragraph 28. Participant support
costs.
  b. To the extent that these costs are
 identifiable with a particular cost objective,
 they should be charged to that objective. (See
paragraph ft of Attachment A.} These costs
 are allowable provided that they meet the
general teat* of allowability. shown in
Attachment A to this Circular.
  c Cost* of meetings and conference* held
 to conduct the general administration of the
organization are allowable.
  25. Memberships, subscriptions, and
professional activity costs.
  a. Costs of the organization's membership
 in civic, business, technical and professional,
organizations are allowable.
  b. Coat* of the organization'* subscriptions
 to civic, business. professional, and  technical
periodical* are allowable.
  c. Coat* of attendance at meeting* and
conference* sponsored by other* when the
 primary purpoM i* the dissemination of
 technical information, an allowable. This
includes costs of meals, transportation, and
other item* incidental to such attendance.
  28. Organization easts. Expenditures, such
a* incorporation fees, brokers' fees, fees (a
promoters, organizers or management
consultants, attorneys, accountants, or
                                                             - 41  -

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                          Federal i>.«gbter  / Vol.  45. No. 132 /  Tuesday.  July ». 1980  /  Notices
                                                                                46031
  invettfflent counselors. whether or not
  employees of the organization, in connection
  with establishment or reorganization of an
  organization, are unallowable except with
  prior approval of the awarding agency.
    27. Overtime, extra-pay thift,-aad  .
  multishift premiums. Premium* for overtime,
  extra-pay shifts, and nmltishifl work an  '  •
  allowable only with the prior approval of the
  awarding agency except: .
 •   a. When necesiary to cope with
  emergencies, such as those resulting from
,~. accidents, natural disasters, breakdowns of
  equipment, or occasional operational  •••
  bottlenecks of a sporadic nature. '
    b. When employees are performing indirect
  functions such as administration.
  maintenance, or accounting.
    c. In the performance of tests, laboratory.
  procedures, or'olher similar operations which
  are continuous in nature and cannot      .  .
  reasonably be interrupted or otherwise '
  completed.
    d. When lower overall cost to the
  Government will result.   -   ,
    28. Page charges in professional journals.
  Page charges for professional journal -
  publications are allowable as a necessary
  part of research costs, where:
    a. The research papers report work
  supported by the Government; and   ' ,--••  ' •_
    b. the charges are levied impartially on all .
  research papers published by the journal.
  whether or not by Government-sponsored
  author*.   .
    29. Participant support costs. Participant
  support costs are direct coats for items such
  as stipends or subsistence allowances, travel
  allowances, and registration fees paid to or
  on behalf of participants or trainees (but:not
  employees) in connection with meetings,
  conferences, symposia, or training protects.
  These costs an allowable with the prior
  approval of the awarding agency.
    30. Patent costs.
    a. Costs of (i) preparing disclosures,
  reports, and other documents required by the
  award and of searching the art to the extend
  necessary to make such disclosures, (ii) •
  preparing documents and any other patent
  costs in connection with the filing and
  prosecution of a United state* patent
  application when title or royalty-free license
  is required by the Government to be  -
 •conveyed to the Government, and (Hi)'general
 counseling services relating to patent and -  •
 copyright matter*, such as advice on patent
. and  copyright laws, regulations, clause*, and'
 employee agreements an allowable (but see
 .paragraph 34).                 •_..-.
 •   b.  Cost of preparing disclosures, reports,
' and other document* and of searching the art
 to the extent necessary, to make disclosure*.
 if not required by the award, an    ..       ,
 unallowable. Costs in connection with (i)
 filing and prosecuting any foreign patent
 application, or (ii) any United Slates patent
 application, where the award doe* not
. require conveying title or a royally-free
 license to the Government, an unallowable  •
 (also see paragraph 43).
   31. Pension plans. See paragraph 6. g.
   32. Plant security costs. Necessary *
 expenses incurred to comply with
 Government security requirement* or for
 facilities protection, including wage*.
  uniform*, and equipment of personnel are
  allowable.
   - 33. Preaward cost*. Preaward costs an
  those incurred prior to the effective date of
  the award directly pursuant to the
  negotiation and in anticipation of the award
  when such coat* is necessary to comply with
  the proposed delivery schedule or period of .
  performance. Such cost* an 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.
   34. Professional service costs.
   a. Costs of professional and consultant
  services rendered by persons  who an
  members of a particular profession or possess
  a special skill and who an not officer* or -
  employee* of the organization, an allowable.
  subject to b, c. and d. of this paragraph when
  reasonable in relation to the service*
  rendered and when not contingent upon
  recovery of die costs from the Government.
   b. In determing the allowability of costs in
  a particular case,  no single factor or any
  special combination of factors is necessarily
  determinative. However, the following  -
.  factor* an relevant:
   (1) The nature and scope of the service
  rendered in relation to the service required.
.   (2) The necessity of contracting for the. -
  service, considering the organization'*
  capability in the particular ana.
   (3) The past pattern of such  coat*.   '
  particularly in the year* prior to Government
  award*.
   (4) The impact of Government award* on
  the organisation's business (Le.. what new
  problems have arisen).
   (5) Whether the proportion of Government
 work to the organisation1* total business i*
 such a* to influence the organization in favor
 of incurring the cost particularly where the
 service* rendered ere not of a  continuing -
 nature and have little relationship to work
 under Government grant* and contracts.
   (0) Whether the service can be performed
 more economically by direct employment
 rather dun contracting.                :
   (?) The qualification* of the individual or
 concern rendering the service and the
 customary fees charged, especially on non-
 Goventment awards.
   (B) Adequacy of the contractual agreement  •
 for the service (e.g» description of the service.
 estimate of time required, rate of
 compensation, and termination provision*}.
  . c. In addition to the factors in paragraph b
 above, retainer fee* to be allowable must be '
 supported by evidence of bona fide services
 available or rendered,
   d. Cost of legal accounting, and consulting
 services, and related costs incurred in
connection with defense of antitrust suit*.'
 and the prosecution of claims against the
Government an unallowable. Costs of legal.
accounting and consulting services, and
related coots, incurred in connection with
patent infringement litigsnon. organization
and reorganization, an unallowable unless
otherwise provided for in the award (but see
paragraph 47*}.
   3& Profits and /asset an disposition of
tupnaoou property of otMf- copitoi assess.
   s. (1) Cain* and losses on sale, retirement
• or other disposition of depreciable property
  shall be included in the year in which they
  occur as credits or charges to cost grouping!s)
  in which the depreciation applicable to such
  property wa* included. The amount of the
  gain or loss to.be included a* a credit or  •
  charge to the appropriate cost groupingfs)
  shall be the difference between the amount
  realized on the property and the
  undepreciated basis of the property.
    (2) Gain* 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 toss is processed through a
  depreciation reserve account and is reflected -
  in the depreciation allowable under
  paragraph?.'
    (b) The property is given in exchange as
  part of the purchase price of a similar item
  and the gain or loss i* 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 a*
  otherwise provided in paragraph tfta.(3).
    (d) Compensation for the use of the
  property, was provided through use
  allowances in lieu of depreciation in
  accordance with paragraph 9.
    (e) Gains and losses arising from mass or
  extraordinary sales, retirements, or other.
  dispositions shall be considered on a case-
  by-case basis.
    b. Gains or losses of any nature arising-
  (ram the sale or exchange of property other
  then the property covered in paragraph a.
  above shall be excluded In computing award
  costs.
    38. Public information serif tee cost*.
    a. Public information service costs include
  the cost associated with pamphlets, news
  releases, and other forms of information
  services. Such costs an normally incurred to:
    (1) Inform or instruct individuals, groups, or
  the general public.
    (2f Interest individual* or group* in
  participating in a service program of the .
  organization.
    (3) Disseminate the results of sponsored
  and nonsponsond activities.
    b.  Public information service costs are
  allowable as direct costs with the prior
  approval of the awarding agency. Such costs
  an unallowable as indirect costs.
    37. Publication and printing costs.
    a.  Publication costs include the cost* of
  printing (innhidlng the processes of
  composition, plate-making, press work.
  binding, and the end products produced by   .
  such processes}, distribution, promotion.
.  mailing, and general handling.
    b.  If these costs era not identifiable with a
  particular cost objective, they should be
  allocated ss indirect cost* to all benefiting   *
  activities of the organization.
    c* PuDucation and printing} coats an  '
  unallowable aa direct costs except with the
  prior approval of the awarding agency.
    d The cost of page charges in journals i*
  addressed pengnpo 2&
    38 Asorjuiiyeflisii/ ooof o/farofioji oaen*.
  Costs incurred for ordinary or normal
  rearrangement and alteration of facilities ere
  allowable. Special arrangement and
  alteration costs incurred specifically for the
  profect an allowable with the prior approval
  of the awarding agency.
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 48032
Federal Register / Vol. 45. No. 132 /  Tuesday. July 8.  1980  / Notices
   38 Reconvenion costs. Costs incurred in
 the reiteration or rehabilitation of the
 organization's facilities to approximately the
 same condition existing immediately prior to
 commencement of Government awards, fair
 wear and tear excepted. ore allowable.
   40. Recruiting costs. The following
 recruiting costs are allowable: cost of "help
 wanted" advertising, operating costs of an
 employment office, costs of operating an
 educational testing program, travel expenses
 including food and lodging of employees
 while engaged in recruiting personnel travel
 costs of applicants for interviews for
 prospective employment, and relocation costs
 incurred incident to recruitment of new
 employees (ice paragraph 41c). Where the
 organization uses employment agencies.
 costs not in excess of standard commercial
 rates for such services' are allowable.
   41. Relocation costs.
   a. Relocation costs are costs incident to the
 permanent change of duty assignment (for an
 indefinite period or for a stated period of not  •
 less than 12 months) of an existing employee
 or upon recruitment of a new employee.
 Relocation costs are allowable, subject to the
 limitation described in paragraphs b. c. and d.
 below, provided that:
   (1) The move is for the benefit of the
 employer.
   (2) Reimbursement to the employee is in
 accordance with an established written
 policy consistently followed by the employer.
   (3) The reimbursement does not exceed the
 employee's actual (or reasonably estimated )
 expenses.
   b. Allowable relocation costs for current
 employees ore limited to the following: ,
   (i) The costs of transportation of the
 employee, members of his immediate family
 and his household, and personal effects to the
 new location.
   (2) The costs of finding a new home, such
 as advance trips by employees and spouses
 to locate living quarters and temporary
 lodging during the transition period, up to a
 maximum, period of 30 days, including
 advance trip time.
   (3) Cosing costs, such as brokerage, legal
 and appraisal fees, incident to the disposition
 of the employee's former home. These costs,
 together with those described in (4) below,
 are limited to 8 per cent of the sales price of
 the employee's former home.
  (4) The continuing costs of ownership of
 the vacant former home after the settlement
 or lease date of the employee's new
 permanent home, such as maintenance of
 buildings and grounds (exclusive of Axing up
 expenses), utilities, taxes, and property
 insurance.
 . (S) Other necessary and reasonable
 expenses normally incident to relocation.
 such as the costs of cancelling an unexpired
 lease, disconnecting and reinstalling
household appliances, and purchasing
insurance against loss of or damages to
personal property. The cost of cancelling an
unexpired lease is limited to three times the
monthly rental.
  c. Allowable relocation costs for new
employees are limited to those described in
(1) and (2) of paragraph b. above. When
relocation costs incurred  incident to the
recruitment of new employees have been
                    allowed either «s a direct or indirect cost and
                    the employee resigns for reasons within his
                    control within 12 months after hire, the
                    organization shall refund or credit the
                    Government for its share of the cost.
                    However, the costs of travel to en overseas
                    location shall be considered travel cost* in
                    accordance with paragraph 50 and not
                    relocation costs for the purpose of this
                    paragraph if dependents are not permitted at
                    the location for any reason and the cost* do
                    not include cost* of transporting household
                    goods.
                      d. The following cost* related to relocation
                    are unallowable:
                      (I) Fee* and other costs associated with
                   • acquiring a new. home.
                      (2) A loss on the sale of a former home.
                      (3) Continuing mortgage principal and
                    interest payments on a home being sold.
                      (4) Income taxes paid by on employee
                    related to reimbursed relocation cost*.
                      &. Rental cottt.
                      a. Subject to the limitations described in
                    paragraphs b. through d. of this paragraph.
                    rental cost* are allowable to the extent that
                    the rates are reasonable in light of such
                    factors as: rental costs of comparable
                    property, if any; market condition* in the
                    area: alternative* available: and the type, life
                    expectancy, condition, end value of the
                    property leased.
                      b. Rental costs under sale end leeseback
                    arrangements are allowable only up to the
                    amount that would be allowed had the
                    organization continued to own the property.
                      c. Rental cost* under less-than-leitgth
                    leases are allowable only up to the amount
                    that would be allowed had title to the
                    property vested in the organization. For this
                    purpose, a lesa-than-erms-length lease is one
                    under which one party to the lease agreement
                    i* able to control or substantially influence
                    the actions of the other.  Such leases include.
                    but are not limited to those between (i)
                    divisions of on organization: fiil organizations
                    under common control through common
                    officers, directors, or members: and (ill) an
                    organization and a director, trustee, officer.
                    or key employee of the organization or his
                    immediate family either directly or through
                    corporation*, trusts, or similar arrangement*
                    in which they hold a controlling interest
                      4 Rental cost* under leases which create a
                    material equity in the leased property ore
                    allowable only up to the amount that would
                    be allowed had the organization purchased
                    the property an the date the lease agreement
                    was executed: e.g., depreciation or use
                    allowances, maintenance, taxes, insurance
                    but excluding interest expense  and other
                    unallowable costs.  For this purpose, a
                    material equity in the property  exist* if the
                    lease in noncancelable or is cancelable only
                    upon the occurrence of some remote
                    contingency and has one or more of the
                    following characteristics:
                      (1) The organization has the right to
                    purchase the property for a price which at the
                    beginning of the lease appears to be
                    substantially less than the probable fair
                    market value at the time it i* permitted to
                    purchase the property (commonly called a
                    lease with a bargain purchase option):
                      (2) Title to the property passes to the
                    organization at some time during or after the
                    lease period:
   (3) The term of the lease (initial term plus
 period* covered by bargain renewal options.
 if any) is equal to 75 per cent or more of the
 economic life of the leased property: i.e.. the
 period the property i* expected to be
 economically usable by one or more users.
   43. Royaltia* and other cottt for 0*9 of
patent* and copyright*.
   a. Royalties on a patent or copyright or
 amortization of the cost of acquiring by
 purchase a copyright, patent or right*
 thereto, necessary for the proper performance
 of the award an allowable unless:
   (1) The Government has a license or the
 right to free use of the patent or copyright.
   (2) The patent  or copyright ha* been
 adjudicated to be invalid, or has been
 administratively determined to be invalid.
   (3) The patent  or copyright is considered to
be unenforceable.
   (4) The patent or copyright i* expired.
   b. Special care should be exercised in
 determining reasonableness where the
royalties may have been arrived at a* a result
of less then arm's length bargaining; e.g.:
   (I) Royalties paid to persons, including
corporations, affiliated with the organization.
   (2) Royalties paid to unaffiliaied parties.
including corporations, under an agreement
entered into in contemplation that a
Government award would be mode.
   (3} Royalties paid under an agreement
entered into after an award ie made to an
organization.
   c. In any  case involving a patent or
copyright formerly owned by the
organization, the amount of royalty allowed
should not exceed the cost which would have
been allowed had the organization retained
title thereto.
  44. Severance pay.
  a. Severance pay, also commonly referred
to es dismissal wage*, i* a payment in
addition to  regular salaries and wages, by
organizations to workers whose employment
is being terminated. Cost* of severance pay
an allowable only to the extent that in each
case, it is required by (i) law, (ii) employer-
employee agreement (iii) established policy
that constitute*, in effect, an implied
agreement on the organization's part, or (iv)
eircununancee of the particular employment.
  b. Coat* of severance payment* are. divided
into two categories a* follows:
  (1) Actual normal turnover severance
payment* shall be allocated to all activities:
or, where the organization provide* for a
reserve for  normal severance* such method
will be acceptable if the charge to current
operation* i* reasonable in light of payments
actually made for normal severances over a
representative past period, and if amounts
charged are allocated to all activities of the
organization.
  (2) Abnormal or man severance pay is of
such a conjectural nature that measurement
of cost* by mean* of an accrual will not
achieve equity to both parties. Thus, accruals
for this purpose an not allowable. However.
the Government recognize* it* obligation to
participate to the extent of it* fair share, in
any specific payment Thus, ailowability will
be considered on a case-by-case basis in the
evant of occurrence.
  45. Specialized service facilities.
  a. The cost* of services provided by highly
complex or  specialized facilities operated by
                                                        -  43  -

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                         Federal  RegiitBr / Vol. 45. No.  132  /  Tuesday. July 6. 1980 /  Notices                 46033
 (he organization, such as electronic
 computer! and wind tunnels, an allowable
 provided the charges Tor the service* meet
 the conditions of either b. or c. of this
 paragraph and. in addition, take into account
 any items of income orTFederal financing that
 qualify as applicable credits under paragraph
 A. 5. of Attachment A.
   b. The costs of such services, when
 material, must be charged directly to
 applicable awards based on actual usage of
 the services on the basis of a schedule of
 rates or established methodology that" (i) does
 not discriminate against federally supported
 activities of the organization, including usage'
 by the organization for internal purposes, and
 (ii) is designed to recover only the aggregate
 costs of the services. The costs of each
 service shall consist normally of both its
 direct costs and its allocable share of all"
 indirect  costs. Advance agreements pursuant
' lo paragraph A.6. of Attachment A  are
 particularly important in this situation.
   c. Where the costs incurred for a  service
 are not material, they may be allocated as
 indirect  costs.
   46, Taxes.
   a. In general, taxes which the organization
 is required to pay and which are paid or
 accrued  in accordance with generally
 accepted accounting principles, and
 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 organization
 directly or which are available to the
 organization based on an exemption afforded
 the Government and in the latter case when
 the awarding agency makes available the
 necessary exemption certificates, (ii) special
 assessments on land which represent capital
 improvements, and (iii) Federal income taxes.
   b. Any refund of taxes, and any payment to
 the organization of interest thereon, which
 were allowed as award costs, will be
 credited  either as a cost reduction or cash
 refund, as appropriate, to the Government.
   47. Termination costs. Termination of
 awards generally give rise to the incurrence
 of costs,  or the need for special treatment of
 costs, which would not have arisen had the   -
 award not been terminated. Cost principle!
 covering these items are set forth below.
 They are to be used in conjunction with the
 other provisions of this Circular in
 termination situations.
   a. Common items. The cost of items
 reasonably usable on the organization's other
 work shall not be allowable unless the
organization submits evidence that it would
not retain such items at coat without
sustaining a loss. In deciding whether such
items are reasonably usable on other work of
the organization, the awarding agency should
consider the organization's plans and orders
for current and scheduled activity.
Contemporaneous purchases of common
items by  the organization shall be regarded
as evidence that such items an reasonably
usable on the organization's other work. Any
acceptance of common items as allocable to
the terminated portion of the award shall be
limited to the extent that the quantities of
such items on hand, in transit, and on order
are in excess of the reasonable quantitative
requirements of other work.
   b. Costa continuing after termination. If in
 a particular case, despite all reasonable
 efforts by the organization, certain costs
 cannot be discontinued immediately after the
 effective date of termination, such costs are
 generally allowable within the limitations set
 forth in this Circular, except that any such
 costs continuing after termination due to the
 negligent or willful'failure of the organization
 to discontinue such costs shell be
 unallowable.
.   c. Loss of useful value. Loss of useful value
 of special tooling, machinery and equipment
 which was not charged to the award as a
 capital expenditure is generally allowable if:
   ill Such special tooting, machinery, or
 equipment is not reasonably capable of use in
 the other work of the organization.
   (2) The interest of the Government la
 protected by transfer of tide or by other
means deemed appropriate by the awarding
agency;
   d. Rental costs. Rental costs under
unexpired leases are generally allowable
where clearly shown to have been
reasonably necessary for the performance of
the terminated award less the residual value
of such leases, if (i) the amount of such rental
claimed does not exceed the reasonable use
value of the property leased for the period, of
the award and such further period as may be
reasonable,  and (ii) the organization nuke*
all reasonable efforts to terminate, assign,  ,  .
settle, or otherwise reduce the cost of soph
lease. There also may be included the cost of
alterations of such leased property, provided-
such alterations were necessary for the
performance of the award, and of reasonable
restoration required by the provisions of the
lease.   '  •          '                .
•  e. Settlement expenses. Settlement
expenses including the  following are
generally allowable:       .       .
   (1) Accounting, legal, clerical and similar  •
costs reasonably necessary for
   (a) The preparation and presentation to
awarding agency of settlement claims and
supporting date with respect to the
terminated portion of the award, unless the
termination is for default (See paragraph 4,a.
of Attachment U OMB Circular No. A-llft
and
   (b) The termination and settlement of
subawards.  •
   (2) Reasonable costs for the storage.
transportation, protection, and disposition of
property provided by the Government or  '
acquired or produced for the award: except
when grantee* are reimbursed for disposals
at a predetermined amount in accordance
with Attachment N of OMB Circular A-110.
  (3) Indirect costs related to salaries end  '
wages incurred as settlement expenses in
subparagnpha (1) and (2) of this paragraph.
Normally, such indirect costs shall be limited
to fringe benefits, occupancy cost and
immediate supervision.
  f. Claims under subawards. Claims under
subawards, including the allocable portion of
claim* which are common to the award, and
lo other work of the organization an
generally allowable. An appropriate share of
the organization's indirect expense may be
allocated to the amount of settlement* with
subcontnctor/subgrantees: provided that the
amount allocated is otherwise consistent
  with the basic guidelines contained in
  Attachment A. The indirect expense so
  allocated shall exclude the same and similar
  costs claimed directly or indirectly as
  settlement expenses.
   48. Training and education costt.  "
   a. Costs of preparation and maintenance of
  a program of instruction including but not
  limited to on-ihe-job. classroom, and
  apprenticeship training, designed to increase
  the vocational effectiveness of employee*.
  including training materials, textbooks,
  salaries or wages of trainees (excluding
  overtime compensation which might arise.
  therefrom), and (i) salaries of the director of
  training and staff when'the training program
  is conducted by the organization: or (ii)
  tuition and fees when die training is in an
  institution not operated by the organization.
  an allowable.
   b. Costs of part-time education, at an
  undergraduate or postgraduate'college level.
  including that provided at  the organization1*
  own facilities, are allowable only when the.
  course or degree punned is relative to  the
  field in which the employee is now working
  or may reasonably be expected to work, and
  an limited to:
   (1) Training materials.
   (2} Textbook*.
   (3) Pee* charge* by the educational  .
  institution.
   (4) Tuition charged by the educational
  institution, or in lieu of tuition, instructors'
  salaries and the related share of indirect
  coats of the educational institution to the
  extent that the sura thereof i* not in excess of.-
  the tuition which would have ben paid to the
  participating educational institution.   .
   (S) Salaries and related co*t* of instructors
  who an employee* of the organization.
   (8) Straight-time compensation of each   .
  employee for time spent attending classes
  during working hours not in excess of 156 •
  hours per year and only to the extent that
  circumstances do not permit the operation of
  classes or attendance at classes after regular
  working hours: otherwise such compensation
  i* unallowable.
   c. Costs of tuition, fee*, training material*.
  and textbook* (but not subsistence, salary,  or -
  any other emoluments) in connection with
  full-time education, including that provided at
  the organization's own facilities, at a
  postgraduate (but not undergraduate) college
  level, an allowable only when the course or
  degree pursued i* related to the Reid In which
  the employee i* now working or may
  reasonably be expected to work, and only
"  when the coat* receive the prior approval of
  the awarding agency. Such coats an limited
  to the cost* attributable to a total period not
  to exceed one school year, for each employee
  10 trained In unusual cases the period may
  be extended.
   d Cost* of attendance of up to 18 week*
  per employee per year at specialized
  program* specifically designed to enhance
  the effectiveness of executive* or managers
  or to prepare employee* for such positions
  an allowable. Such cost* include enrollment
  fee*, training materials, textbooks and
 related charge*, employee*' salaries.   .
 subsistence, and travel. Cost* allowable
 under this paragraph do not include those for
 courses that an pan of a degree-oriented

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 46034
F«d«nl Jtogtittr /  Vol. 45. No. 132 /  Tumtoy. July 8.1990 /  Notice
curriculum, which are allowable only to the
txtent let forth in b. and c. above.
   e. Maintenance expense, and normal
depreciation or fair rental, on facilities
owned or leased by the organisation for
 training purpose! are allowable to the extent
 MI forth in paragraphs 9.22, and 42.
   f. Contribution* or donation* to
educational or training institution*, including
the donation of facilities or other properties.
and scholarships or fellowships, are
unallowable.
   g. Training and education costs in excess of
those otherwise allowable under paragraphs
b. and c. of this paragraph may be allowed
with prior approval of the awarding agency.
To be considered for approval the
organisation must demonstrate that such
cost* are consistently incurred pursuant to an
established training and education program*
and thai  the course or degree pursued is
relative to the field in which the employee is
now working or may reasonably be expected
to work.
  49. Transportation costs. Transportation
costs include freight, express, cartage, and
postage charges relating either to goods
purchased, in process, or delivered* Thesk
costs are allowable. When such cost* can
readily be identified with the items involved.
they may be directly charged as
transportation costs or added to the cost of
such items (see paragraph 23). Where
identification with  the materials received
cannot readily be made, transportation costs
may be charged to  the appropriate indirect
cost accounts if the organization follows a
consistent, equitable procedure in this  .
respect.
  SO. Travel cotu.
  a. Travel cost* are the expenses for
transportation, lodging, subsistence, and-
related item* incurred by employees who  are
in travel status on official business of the
organization. Travel costs are allowable
subject to paragraphs b. through e. below.
when they are directly attributable to specific
work under an award or are incurred in the
normal course of administra lion of the
organization.
  b. Such costs may be charged on an actual
basis, on a per diem or mileage basis in lieu
of actual  coats incurred, or on a combination
of the two. provided the method used result*
in charges consistent with those normally
allowed by the organization in ita regular
operation*.
  c. The difference in cost between first-class
air accommodations and less than first-class
air accommodations is unallowable except
when less than first-class air
accommodations are not reasonably
available to meet necessary mission
requirements, such  as where las* than first-
class accommodations would (i) require
circuitous routing, (ii) require travel during
unreasonable hours, (iii) greatly increase the
duration of the flight, (iv) result in additional
costs which would offset the transportation
savings, or (v) offer accommodations which
are not reasonably  adequate for the medical
needs of the traveler.
  d. Necessary and reasonable costs of
family movement* and personnel movements
of a special or mass nature are allowable.
pursuant  to paragraphs 40 and 41. subject to
                  allocation on the basis of work or time period
                  benefited when appropriate. Advance
                  agreements are particularly important
                    e. Direct charges for foreign travel costs are
                  allowable only when the travel has received
                  prior approval of the awarding agency. Each
                  separate foreign trip must be approved. For
                  purposes of this provision, foreign travel is
                  defined as any travel outside of Canada and
                  ihe United Slates and Its territories and
                  possessions. However, for an organisation
                  located in foreign countries, the term "foreign
                  travel" means travel outside that country.
                  [Circular No. A-122)

                  AttachmatC
                  Noopnffl Organization no* SobfM to ttt»
                  Oreular
                  Aerospace Corporation. El Segundo.
                    California
                  Argonne Universities Association. Chicago,
                    Illinois
                  Associated Universities. Incorporated.
                    Washington. O.C
                  Associated Universities for Research and
                    Astronomy. Tucson. Arizona)
                  Atomic Casualty Commission. Washington,
                    D.C
                  Battelle Memorial Institute. Headquartered in
                    Columbus. Ohio
                  Brookhaven National Laboratory. Upton.
                    New York
                  Center for Energy and Environmental
                    Research (GEEK), (University of Puerto
                    Rico) Commonwealth of Puerto Rico
                  Charles Stark Draper Laboratory,
                    Incorporated. Cambridge. Massachusetts
                  Comparative Animal Research Laboratory
                    (CARL)
                  (University of Tennessee). Oak Ridge.
                    Tennessee
                  Environmental Institute of Michigan. Ann
                    Arbor. Michigan
                  Hanford Environmental Health Foundation,
                    Richland. Washington
                  UT Research Institute. Chicago. Illinois
                  Institute for Defense Analysis. Arlington.
                    Virginia
                  Institute of Gas Technology, Chicago, Illinois
                  Midwest Research Institute, Headquartered
                    in Kansas City. Missouri
                  Mitre Corporation. Bedford. Massachusetts
                  Montana Energy Research and Development
                    Institute. Inc. (MERDI). Butte, Montana
                  National Radiological Astronomy
                    Observatory. Green Bank. West Virginia
                  Oak Ridge Associated Universities. Oak
                    Ridge, Tennessee
                  Project Management Corporation. Oak Ridge.
                    Tennessee
                  Rand Corporation, Santa Monica, California
                  Research Triangle Institute. Research
                    Triangle Park. North Carolina
                  Riverside Research Institute, New York. New
                    York
                  Sandia Corporation. Albuquerque, New
                    Mexico
                  Southern Research Institute. Birmingham.
                    Alabama
                  Southwest Research Institute. San Antonio.
                    Texas
                  SRI International. Menlo Park. California
                  Syracuse Research Corporation. Syracuse.
                    New York
Universities Research Association.
  Incorporated (National Acceleration Lab),
  Argonne, Illinois
Universities Corporation for Atmospheric
  Research. Boulder. Colorado
Nonprofit Insurance Companies such as Blue
  Cross and Blue Shield Organizations
Other nonprofit organizations as negotiated
  with awarding agencies.
imuoe.avawnM7-r-sftta.nl •
SJUMO COW *f tO-S1.«

(Note: This reprint incorporates corrections
published at 46 FR 17185. Tuesday. March 17,
1981.)
                                                               - 45  -

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                                                               .  APPENDIX 5"
                    SAMPLE" FORM,-CERTIFrICATION: BY AN. AUTHORIZED
                          NONPROFIT ORGANIZATION OFFICIAL
          I hereby certi-f.y; that  the? information contained in the  indirect
     cost-rate proposal  for-the  fiscal year ended, or ending:
     	j	and which is attached" to,  this
     (Month/Date/Year)
     certification is prepared in conformance with Office of Management and.
     Budget Circular A-122..  I-further, certify/: (1) that the same costs that
     have been treated as* indirect; costs have' not. been* claimed as direct •
     costs., (2). that similar  types of costs, have: been, accorded consistent
     accounting treatment.,  ,and_i(3) that the. information provided  by  the
     organization which  was used as a. basis for acceptance  of the-rate(s) is
     not subsequently .found' to be: materially inaccurate.
                                                 (Signature)
                                                   (Name;)
                                                   (Title)
                                           (Name? of,. Organization*)
-1.
                                       - 46 -

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