-------
H. R. 2005—33
"(m) Agency for Toxic Substances and Disease Registry.—
There shall be directly available to the Agency for Toxic Substances
and Disease Registry to be used for the purpose of carrying out
activities described in subsection (cX4) and section 104(i) not less
than $50,000,000 per fiscal year for each of fiscal years 1987 and
1988, not less than $55,000,000 for fiscal year 1989, and not less than
$60,000,000 per fiscal year for each of fiscal years 1990 and 1991.
Any funds so made available which are not obligated by the end of
the fiscal year in which made available shall be returned to the
Fund.
"(n) Limitations on Research, Development, and Demonstra-
tion Program.—
"(1) Section 311(b).—For each of the fiscal years 1987, 1988,
1989, 1990, and 1991, not more than $20,000,000 of the amounts
available in the Fund may be used for the purposes of carrying
out the applied research, development, ana demonstration pro-
gram for alternative or innovative technologies and training
program authorized under section 311(b) (relating to research,
development, and demonstration) other than basic research.
Such amounts shall remain available until expended.
"(2) Section 3ii(ai.—From the amounts available in the
Fund, not more than the following amounts may be used for the
purposes of section 311(a) (relating to hazardous substance
research, demonstration, and training activities):
"(A) For the fiscal year 1987, $3,000,000.
"(B) For the fiscal year 1988. $10,000,000.
"(C) For the fiscal year 1989, $20,000,000.
"(D) For the fiscal year 1990, $30,000,000.
"(E) For the fiscal year 1991, $35,000,000.
No more than 10 percent of such amounts shall be used for
training under section 311(a) in any fiscal year.
"(3) Section 3ii(d>.—For each of the fiscal years 1987, 1988,
1989, 1990, and 1991, not more than $5,000,000 of the amounts
available in the Fund may be used for the purposes of section
311(d) (relating to university hazardous substance research
centers).
"(o) Notification Procedures for Limitations on Certain Pay-
ments.—Not later than 90 days after the enactment of this subsec-
tion, the President shall develop and implement procedures to
adequately notify, as soon as practicable after a site is included on
the National Priorities List, concerned local and State officials and
other concerned persons of the limitations, set forth in subsection
(aX2) of this section, on the payment of for necessary response
costs incurred with respect to such site.".		
(i) Authorization of Appropriations.—Section 111 of CERCLA is
amended by adding the following subsection after subsection (oh
"(p) General Revenue Share of Superfund.—
"(1) In general.—The following sums are authorized to be
appropriated, out of any money in the Treasury not otherwise
appropriated, to the Hazardous Substance Superfund:
"(A) For fiscal year 1987, $212,500,000.
"(B) For fiscal year 1988, $212,500,000.
"(C) For fiscal year 1989, $212,500,000.
"(D) For fiscal year 1990, $212,500,000.
"(E) For fiscal year 1991, $212,500,000.
In addition there is authorized to be appropriated to the
Hazardous Substance Superfund for each fiscal year an amount

-------
H. R. 2005—34
equal to so much of the aggregate amount authorized to be
appropriated under this subsection (and paragraph (2) of section
221(b) of the Hazardous Substance Response Revenue Act of
1980) as has not been appropriated before the beginning of the
fiscal year involved.
"(2) Computation.—The amounts authorized to be appro-
priated under paragraph (1) of this subsection in a given fiscal
year shall be available only to the extent that such amount
exceeds the amount determined by the Secretary under section
9507(bX2) of the Internal Revenue Code of 1986 for the prior
fiscal year.".
SEC. 112. CLAIMS PROCEDURE.
(a)	Claims Against the Fund tor Response Costs.—Section
112(a) of CERCLA is amended to read as follows:
"(a) Claims Against the Fund tor Response Costs.—No ^lai™
may be asserted against the Fund pursuant to section 111(a) unites
such claim is presented in the first instance to the owner, operator,
or guarantor of the vessel or facility from which a hazardous
substance has been released, if known to the claimant, and to any
other person known to the claimant who may be liable under section
107. In any case where the claim has not been satisfied within 60
days of presentation in accordance with this subsection, the claim-
ant may present the claim to the Fund for payment. No claim
against the Fund may be approved or certified during the pendency
of an action by the claimant in court to recover costs which are the
subject of the claim.".
(b)	Procedures.—Section 112(b) is amended by striking "(bXl)"
and inserting "(bXl) Prescribing Forms and Procedures.—" and
by striking paragraphs (2), (3), and (4) and inserting the following:
"(2) Payment or Request for Hearing.—The President may, if
satisfied that the information developed during the processing of the
claim warrants it, make and pay an award of the claim, except that
no claim may be awarded to the extent that a judicial judgment has
been made on the costs that are the subject of the claim. If the
President declines to pay all or part of the claim, the claimant may,
within 30 days after receiving notice of the President's decision,
request an administrative hearing.
"(3) Burden of Proof.—In any proceeding under this subsection,
the claimant shall bear the burden of proving his claim.
"(4) Decisions.—All administrative decisions made hereunder
shall be in writing, with notification to all appropriate parties, and
shall be rendered within 90 days of submission of a claim to an
administrative law judge, "nlogg all the parties to the claim agree in
writing to an extension or unless the President, in his discretion,
extends the time limit for a period not to exceed sixty days.
"(5) Finality and Appeal.—All administrative decisions here-
under shall be final, and any party to the proceeding may appeal a
decision within 30 days of notification of the award or decision. Any
such appeal shall be made to the Federal district court for the
district where the release or threat of release took place. In any such
appeal, the decision shall be considered binding and conclusive, and
shall not be overturned except for arbitrary or capricious abuse of
discretion.
"(6) Payment.—Within 20 days after the expiration of the appeal
period for any administrative decision concerning an award, or
within 20 days after the final judicial determination of any appeal

-------
H. R. 2005—35
taken pursuant to this subsection, the President shall pay any such
award from the Fund. The President shall determine the method,
terms, and time of payment".		
(c)	Statute of Limitations.—Section 112(d) of CERCLA is
amended to read as follows:
"(d) Statute op Limitations.—
"(1) Claims for recovery of costs.—No claim may be pre-
sented under this section for recovery of the costs referred to in
section 107(a) after the date 6 years after the date of completion
of all response action.
"(2) Claims for recovery of damages.—No claim may be
presented under this section for recovery of the damages re-
ferred to in section 107(a) unless the claim is presented within 3
years after the later of the following:
"(A) The date of the discovery of the loss and its connec-
tion with the release in question.
. "(B) The date on which final regulations are promulgated
under section 30.1(c).
"(3) Minors and incompetents.—The time limitations con-
tained herein shall not begin to run—
"(A) against a minor until the earlier of the date when
such minor reaches 18 years of age or the date on which a
legal representative is duly appointed for the minor, or
"(B) against an incompetent person until the earlier of
the date on which such person's incompetency ends or the
date on which a legal representative is duly appointed for
such incompetent person.'.
(d)	Double Recovery Prohibited.—Section 112 of CERCLA is
amended by adding the following new subsection at the end thereof:
"(f) Double Recovery Prohibited.—Where the President has paid
out of the Fund for any response costs or any costs specified under
section 111(c) (1) or (2), no other claim may be paid out of the Fund
for the same costs.".
SEC 113. LITIGATION. JURISDICTION. AND VENUE.
(a) Nationwide Service op Process.—Section 113 of CERCLA is
amended by adding the following new subsection at the end thereof:
"(e) Nationwide Service of Process.—In any action by the
United States under this Act, process may be served in any district
where the defendant is found, resides, transacts business, or has
appointed an agent for the service of process.".
fb) Contribution; Statute of Limitations.—Section 113 of
CERCLA is amended by adding the following new subsections after
subsection (e):
"(f) Contribution.—
"(1) Contribution.—Any person may seek contribution from
any other person who is liable or potentially liable under
section 107(a), during or following any civil action under section
106 or under section 107(a). Such f»i«itn» shall be brought in
accordance with this section and the Federal Rules of Civil
Procedure, and shall be governed by Federal law. In resolving
contribution claims, the court may allocate response costs
among liable parties using such equitable factors as the court
determines are appropriate. Nothing in this subsection shall
diminish the right of any person to bring an action for contri-
bution in ttie absence of a civil action under section 106 or
section 107.

-------
H. R. 2005—36
"(2) Settlement.—A person who has resolved its liability to
the United States or a State in an administrative or judicially
approved settlement shall not be liable for Haimg for contribu-
tion regarding matters addressed in the settlement. Such settle-
ment does not discharge any of the other potentially liable
persons unless its terms so provide, bat it reduces the potential
liability of the others by the amount of the settlement.
"(3) PERSONS NOT PARTY TO SETTLEMENT.—(A) If the United
States or a State has obtained less than complete relief from a
Serson who has resolved its liability to the United States or the
tate in an administrative or judicially approved settlement,
the United States or the State may bring an action against any
person who has not so resolved its liability.
"(B) A person who has resolved its liability to the United
States or a State for some or all of a response action or for some
or all of the costs of such action in an administrative or
judicially approved settlement may seek contribution from any
person who is not party to a settlement referred to in para-
graph (2).
"(O In any action under this paragraph, the Yights of any
Sarson who has resolved its liability to the United States or a
tate shall be subordinate to the rights of the United States or
the State. Any contribution action brought under this para-
graph shall be governed by Federal law.
"(g) Period in Which Action May Be Brought.—
"(1) Actions for natural resource damages.—Except as
provided in paragraphs (3) and (4), no action may be commenced
for damages (as defined in section 101(6)) under this Act, unless
that action is commenced within 3 years after the later of the
following;
"(A) The date of the discovery of the loss and its connec-
tion with the release in question.
"(B) The date on which regulations are promulgated
under section 301(c).
With respect to any facility listed on the National Priorities List
(NPL), any Federal facility identified under section 120 (relating
to Federal facilities), or any vessel or facility at which a re-
medial action under this Act is otherwise scheduled, an action
for damages under this Act must be commenced within 3 years
after the completion of the remedial action (excluding operation
and maintenance activities) in lieu of the dates referred to in
subparagraph (A) or (B). In no event may an action for damages
under this Act with respect to such a vessel or facilitv be
commenced (i) prior to 60 days after the Federal or State
natural resource trustee provides to the President and the
potentially responsible party a notice of intent to file suit, or (ii)
before selection of the remedial action if the President is dili-
gently proceeding with a remedial investigation and feasibility
study under section 104(b) or section 120 (relating to Federal
facilities). The limitation in the preceding sentence on
commencing an action before giving notice or before selection of
the remedial action does not apply to actions filed on or before
the enactment of the Superfund Amendments and Reauthoriza-
tion Act of 1986.
"(2) Actions for recovery of costs.—An initial action for
recovery of the costs referred to in section 107 must be com-
menced—

-------
H. R. 2005—37
"(A) for a removal action, within 3 years after completion
of the removal action, except that such cost recovery action
must be brought within 6 years after a determination to
grant a waiver under section 104(cXlXG for continued re-
sponse action; and
"(B) for a remedial action, within 6 years after initiation
of physical on-site construction of the remedial action,
except that, if the remedial action is initiated within 3
years after the completion of the removal action, costs
incurred in the removal action may be recovered in the cost
recovery action brought under this subparagraph.
In any such action described in this subsection, the court shall
enter a declaratory judgment on liability for response costs or
damages that will be binding on any subsequent action or
actions to recover further response costs or damages. A subse-
quent action or actions under section 107 for further response
costs at the vessel or facility may be maintained at any time
during the response action, but must be commenced no later
than 3 years after the date of completion of all response action.
Except as otherwise provided in this paragraph, an action may
be commenced under section 107 for recovery of costs at any
time after such costs have been incurred.
"(3) Contribution. —No action for contribution for any re-
sponse costs or damages may be commenced more than 3 years
after—
"(A) the date of judgment in any action under this Act for
recovery of such costs or damages, or
"3) the date of an administrative order under section
122(g) (relating to de minimis settlements) or 122(h) (relat-
ing to cost recovery settlements) or entry of a judicially
approved settlement with respect to such costs or damages.
"(4) Subrogation.—No action based on rights subrogated
pursuant to this section by reason of payment of a claim may be
commenced under this title more than 3 years after the date of
payment of such claim.
"(5) Actions to recover indemnification payments.—Not-
withstanding any other provision of this subsection, where a
payment pursuant to an indemnification agreement with a
response action contractor is made under section 119, an action
under section 107 for recovery of such indemnification payment
from a potentially responsible party may be brought at any time
before the expiration of 3 years from the date on which such
payment is made.
"(6) Minors and incompetents.—The time limitations con-
tained herein shall not begin to run—
"(A) against a minor until the earlier of the date when
such minor reaches 18 years of age or the date on which a
legal representative is duly appointed for such minor, or
"(B) against an incompetent person until the earlier of
the date on which such incompetent's incompetency ends or
the date on which a legal representative is duly appointed
for such incompetent.".
(c) Fee-Enforcement Review.—		
(1) Conforming amendment.—Section 113(b) of CERCLA is
amended by striking out "subsection" and inserting in lieu
thereof "subsections and inserting "and (h)" after "(a)'

-------
H. R. 2005—38
(2) Timinc op eeview; administrative record.—Section 113
of CERCLA is amended by adding at the end thereof the
following new subsections:
"(h) Timing op Review.—No Federal court shall have jurisdiction
under Federal law other than under section 1332 of title 28 of the
United States Code (relating to diversity of citizenship jurisdiction)
or under State law which is applicable or relevant and appropriate
under section 121 (relating to cleanup standards) to review any
challenges to removal or remedial action selected under section 104,
or to review any order issued under section 106(a), in any action
except one of the following:
"(1) An action under section 107 to recover response costs or
damages or for contribution.
"(2) An action to enforce an order issued under section 106(a)
or to recover a penalty for violation of such order.
"(3) An action for reimbursement under section 106(bX2).
"(4) An action under section 310 (relating to citizens suits)
alleging that the removal or remedial action taken under sec-
tion 104 or secured under section 106 was in violation of any
requirement of this Act Such an action may not be brought
with regard to a removal where a remedial action is to be
undertaken at the site.
"(5) An action under section 106 in which the United States
has moved to compel a remedial action.
"(i) Intervention.—In any action commenced under this Act or
under the Solid Waste Disposal Act in a court of the United States,
any person may intervene as a matter of right when such person
claims an interest relating to the subject of the action and is so
situated that the disposition of the action may, as a practical matter,
impair or impede the person's ability to protect that interest, unless
the President or the State shows that the person's interest is
adequately represented by gyisri-ng parties.
"(j) Judicial Review.—
"(1) Limitation.—In any judicial action under this Act, ju-
dicial review of any issues concerning the adequacy of any
response action taken or ordered by the President shall
be limited to the administrative record. Otherwise applicable
principles of administrative law shall govern whether any
supplemental materials may be considered by the court.
'(2) Standard.—In considering objections raised in any
judicial action under this Act, the court shall uphold the
President's decision in selecting the response action unless the
objecting party can demonstrate, on the administrative record,
that the decision was arbitrary and capricious or otherwise not
in accordance with law.
"(3) Remedy.—If the court finds that the selection of the
response action was arbitrary and capricious or otherwise not in
accordance with law, the court shall award (A) only the re-
sponse costs or damages that are not inconsistent with the
national contingency plan, and (B) such other relief as is consist-
ent with the National Contingency Plan.
"(4) Procedural errors.—In reviewing alleged procedural
errors, the court may disallow costs or damages only if the
errors were so serious and related to matters of such central
relevance to the action that the action would have been signifi-
cantly changed had such errors not been made,
"(k) Administrative Record and Participation Procedures.—

-------
H. R. 2005—39
"(1) Administrative record.—The President shall establish
an administrative record upon which the President shall base
the selection of a response action. The administrative record
shall be available to the public at or near the facility at issue.
The President also may place duplicates of the administrative
record at any other location
"(2) Participation procedures.—
"(A) Removal action.—The President shall promulgate
regulations in accordance with chapter 5 of title 5 of the
United States Code establishing procedures for the appro-
priate participation of interested persons in the develop-
ment of the administrative record on which the President
will base the selection of removal actions and on which
judicial review of removal actions will be based.
"(B) Remedial action.—The President shall provide for
the participation of interested persons, including poten-
tially responsible parties, in the development of the
administrative record on which the President will base the
selection of remedial actions and on which judicial review
of remedial actions will be based. The procedures developed
under this subparagraph shall include, at a minimum, each
of the following:
"(i) Notice to potentially affected persons and the
public, which shall be accompanied by a brief analysis
of the plan and alternative plans that were considered.
"(ii) A reasonable opportunity to comment and pro-
vide information regarding the plan.
"(iii) An opportunity for a public meeting in the
affected area, in accordance with section
I17(aX2) (relating to public participation).
"(iv) A response to each of the significant comments,
criticisms, and new data submitted in written or oral
presentations.
"(v) A statement of the basis and purpose of the
selected action.
For purposes of this subparagraph, the administrative
record shall include all items developed and received under
this subparagraph and all items described in the second
sentence of section 117(d). The President shall promulgate
regulations in accordance with chapter 5 of title 5 of the
United States Code to carry out the requirements of this
subparagraph.
"(C) Interim record.—Until such regulations under sub-
paragraphs (A) and (B) are promulgated, the administrative
record shall consist of all items developed and received
pursuant to current procedures for selection of the response
action, including procedures for the participation of in-
terested parties and the public. The development of an
administrative record and the selection of response action
under , this Act shall not include an adjudicatory hearing.
"(D) Potentially responsible parties.—The President
shall make reasonable efforts to identify and notify poten-
tially responsible parties as early as possible before selec-
tion of a response action. Nothing in this paragraph shall
be construed to be a defense to liability.
"(1) Notice of Actions.—Whenever any action is brought under
this Act in a court of the United States by a plaintiff other than the

-------
a R. 2005—40
United States, the plaintiff shall provide a copy of the complaint to
the Attorney General of the United States and to the Administrator
of the Environmental Protection Agency.".
SEC. 114. RELATIONSHIP TO OTHER LAW.
(a)	Used Oil.—Section 114(c) of CERCLA is amended to read as
follows:
"(c) Recycled Oil—
"(1) Service station dealers, etc.—No person (including the
United States or any State) may recover, under the authority of
subsection (aX3) or (aX4) of section 107, from a service station
dealer for any response costs or damages resulting from a
release or threatened release of recycled oil, or use the author-
ity of section 106 against a service station dealer other than a
person described in subsection (aXl) or (aX2) of section 107, if
such recycled oil—
"(A) is not mixed with any other hazardous substance,
and
"(B) is stored, treated, transported, or otherwise -managed
in compliance with regulations or standards promulgated
pursuant to section 3014 of the Solid Waste Disposal Act
and other applicable authorities.
Nothing in this paragraph shall affect or modify in any way the
obligations or liability of any person under any other provision
of State or Federal Law, including common law, for damages,
injury, or loss resulting from a release or threatened release of
any hazardous substance or for removal or remedial action or
the costs of removal or remedial action.
"(2) Presumption.—Solely for the purposes of this subsection,
a service station dealer may presume that a small quantity of
used oil is not mixed with other hazardous substances if it—
"(A) has been removed from the engine of a light duty
motor vehicle or household appliances by the owner of such
vehicle or appliances, and
"(B) is presented, by such owner, to the dealer for collec-
tion, accumulation, and delivery to an oil recycling facility.
"(3) Definition.—For purposes of this subsection, the terms
'used oil' and 'recycled oil' .have the same meanings as set forth
in sections 1004(36) and 1004(37) of the Solid Waste Disposal Act
and regulations promulgated pursuant to that Act.
"(4) Effective date.—The effective date of paragraphs- (1) and
(2) of this subsection shall be the effective date of regulations cr
standards promulgated under section 3014 of the Solid Waste
Disposal Act that include, among other provisions, a require-
ment to conduct corrective action to respond to any releases of
recycled oil under subtitle Cor subtitle I of such Act.".
(b)	Definition of Service Station Dealer.—Section 101 of
CERCLA is amended by inserting the following at the end thereof:
"(37XAJ The term service station dealer' means any person—
"(i) who owns or operates a motor vehicle service station,
filling station, garage, or similar retail establishment en-
gaged in the business of selling, repairing, or servicing
motor vehicles, where a significant percentage of the gross
revenue of the establishment is derived from the fueling,
repairing, or servicing of motor vehicles, and
"(ii) who accepts for collection, accumulation, and deliv-
ery to an oil recycling facility, recycled oil that (I) has been

-------
H. R. 2005—41
removed from the engine of a light duty motor vehicle or
household appliances by the owner of such vehicle or appli-
ances, and (Q) is presented, by such owner, to such person
for collection, accumulation, and delivery to an oil recycling
facility.
"(B) For purposes of section 114(c), the term 'service station
dealer' shall, notwithstanding the provisions of subparagraph
(A), include any government agency that establishes a facility
solely for the purpose of accepting recycled oil that satisfies the
criteria set forth in subclauses (I) and (II) of subparagraph
(AXii), and, with respect to recycled oil that satisfies the criteria
set forth in subclauses (I) and (II), owners or operators of refuse
collection services who are compelled by State law to collect,
accumulate, and deliver such oil to an oil recycling facility.
"(C) The President shall promulgate regulations regarding
the determination of what constitutes a significant percentage
of the gross revenues of an establishment for purposes of this
paragraph.".
SEC US. DELEGATION: REGULATIONS.
Section 115 of CERCLA is not amended.
SEC. Ufi. SCHEDULES.
Title I of CERCLA is amended by adding the following new section
after section 115:
"SEC. 116. SCHEDULES.
"(a) Assessment and Listing of Faciijties.—It shall be a goal of
this Act that, to the maximum extent practicable—
"(1) not later than January 1, 1988, the President shall com-
plete preliminary assessments of all facilities that are contained
(as of the date of enactment of the Superfund Amendments and
Reauthorization Act of 1986) on the Comprehensive Environ-
mental Response, Compensation, and Liability Information
System (CERCLIS) including in .each assessment a statement as
to whether a site inspection is necessary and by whom it should
be carried out; and
"(2) not later than January 1,1989, the President shall assure
the completion of site inspections at all facilities for which the
President has stated a site inspection is necessary pursuant to
paragraph (1).
"(b) Evaluation.—Within 4 years after enactment of the
Superfund Amendments and Reauthorization Act of 1986, each
facility listed (as of the date of such enactment) in the CERCLIS
shall be evaluated if the President determines that such evaluation
is warranted on the basis of a site inspection or preliminary assess-
ment The evaluation shall be in accordance with the criteria estab-
lished in section 105 under the National Contingency Plan for
determining priorities among release for inclusion on the National
Priorities List. In the case of a facility listed in the CERCLIS after
the enactment of the Superfund Amendments , and Reauthorization
Act of 1986, the facility shall be evaluated within 4 years after the
date of such listing if the President determines that such evaluation
is warranted on the basis of a site inspection or preliminary
assessment.
"(c) Explanations.—If any of the goals established by subsection
(a) or (b) are not achieved, the President shall publish an expla-

-------
H. R. 2005—42
nation of why such action could not be completed by the specified
date.
"(d) Commencement or RI/FS.—'The President shall assure that
remedial investigations .and feasibility studies (RI/FS) are com-
menced for facilities listed on the National Priorities List, in addi-
tion to those commenced prior to the date of enactment of the
Superfund Amendments and Reauthorization Act of 1986, in accord-
ance with the following schedule:
"(1) not fewer than 275 by the date 36 months after the date of
enactment of the Superfund Amendments and Reauthorization
Act of 1986, and
"(2) if the requirement of paragraph (1) is not met, not fewer
than an additional 175 by the date 4 years after such date of
enactment, an additional 200 by the date 5 years after such date
of enactment, and a total of 650 by the date 5 years after such
date of enactment.
"(e) Commencement of Remedial Action.—The President shall
assure that substantial and continuous physical on-site remedial
action commences at facilities on the National Priorities List, in
addition to those facilities on which remedial action has commenced
prior to the date of enactment of the Superfund Amendments and
Reauthorization Act of 1986, at a rate not fewer than:
"(1) 175 facilities during the first 36-month period after enact-
ment of this subsection; and
"(2) 200 additional facilities during the following 24 months
after such 36-month period.".
SEC. 117. PUBLIC PARTICIPATION.
Title 1 of CERCLA is amended by adding the following new section
after section 116:
-SEC 117. PUBLIC PARTICIPATION.
"(a). Proposed Plan.—Before adoption of any plan for remedial
action to be undertaken by the President by a State, or by any other
person, under section 104, 106, 120, or 122, the President or State, as
appropriate, shall take both of the following actions:
"(1) Publish a notice and brief analysis of the proposed plan
and make such plan available to the public.
"(2) Provide a reasonable opportunity for submission of writ-
ten and oral comments and an opportunity for a public meeting
at or near the facility at issue regarding the proposed plan and
regarding any proposed findings under section 121(dX4) (relating
to cleanup standards). The President or the State shall keep a
transcript of the meeting and make such transcript available to
the public. .
The notice and analysis published under paragraph (1) shall include
sufficient information as may be necessary to provide a reasonable
explanation of the proposed plan and alternative proposals
considered.
"(b) Final Plan.—Notice of the final remedial action plan
adopted shall.be published and the plan shall be made available to
the public before commencement of any remedial action. Such final
plan shall be accompanied by a discussion of any significant changes
(and the reasons for such changes) in the proposed plan and a
response to each of the significant comments, criticisms, and new
v data submitted in written or oral presentations under subsection (a).

-------
H. R. 2005—43
"(c) Explanation of Differences.—After adoption of a final
remedial action plan—
"(1) if any remedial action is taken,
"(2) if any enforcement action under section 106 is taken, or
"(3) if any settlement or consent decree under section 106 or
section 122 is entered into,
and if such action, settlement, or decree differs in any significant
respects from the final plan, the President or the State shall publish
an explanation of the significant differences and the reasons such
changes were made.
"(d) Publication.—For the purposes of this section, publication
shall include, at a minimum, publication in a major local newspaper
of general circulation. In addition, each item developed, received,
published, or made available to the public under this section shall be
available for public inspection and copying at or near the facility at
issue.
"(e) Grants foe Technical Assistance.—
"(1) Authority.—Subject to such amounts as are provided in
appropriations Acts and in accordance with rules promulgated
by the President, the President may make grants available to
any group of individuals which may be affected by a release or
threatened release at any facility which is listed on the Na-
tional Priorities List under the National Contingency Plan.
Such grants may be used to obtain technical amiatanne in
interpreting information with regard to the nature of the
hazard, remedial investigation and feasibility study, record of
decision, remedial design, selection and construction of remedial
action, operation and maintenance, or removal action at such
facility.
"(2) Amount.—The amount of any grant under this subsec-
tion may not exceed $50,000 for a single grant recipient. The
President may waive the $50,000 limitation in any case where
such waiver is necessary to carry out the purposes of this
subsection. Each grant recipient shall be required, as a condi-
tion of the grant, to contribute at least 20 percent of the total of
costs of the technical assistance for which such grant is made.
The President may waive the 20 percent contribution require-
ment if the grant recipient demonstrates financial need and
such waiver is necessary to facilitate public participation in the
selection of remedial action at the facility. Not more than one
grant may be made under this subsection with respect to a
single facility, but the grant may be renewed to facilitate public
participation at all stages of remedial action.".
SEC US. MISCELLANEOUS PROVISIONS.
(a)	Priority for Drinking Water Supplies.—Title I of CERCLA
is amended by adding the following new section after section 117:
"SEC. 116. HIGH PRIORITY FOR DRINKING WATER SUPPLIES.
"For purposes of taking action under section 104 or 106 and listing
facilities on the National Priorities List, the President shall give a
high priority to facilities where the release of hazardous substances
or pollutants or contaminants has resulted in the closing of drinking
water wells or has contaminated a principal drinking water
supply.".
(b)	Removal and Temporary Storage of Containers of Radon
Contaminated Soil.—Not later than 90 days after the enactment of.

-------
H.R.2005—44
this Act, the Administrator shall make a grant of $7,500,000 to the
State of New Jersey for transportation from residential areas in the
State of New Jersey and temporary storage of approximately 14,000
containers of radon contaminated soil which is the subject of a
remedial action for which a remedial investigation and feasibility
study has been initiated before such date. Such containers be
transported to and temporarily stored at any site in the State of
New Jersey designated by the Governor of such State. For purposes
of section 111(a) of CERCLA, the grant under this subsection for
transportation and storage of such containers shall be treated as
payment of governmental response cost incurred pursuant to section
104 of CERCLA.
(c)	Unconsolidated Quaternary Aquifer.—Notwithstanding
any other provision of law, no person may—
(1)	locate or authorize the location of a landfill, surface
impoundment, waste pile, injection well, or land treatment
facility over the Unconsolidated Quaternary Aquifer, or the
recharge zone or streamflow source zone of such aquifer, in the
Rockaway River Basin, New Jersey {as such aquifer and zones
are described in the Federal Register, January 24, 1984, pages
2946-2948); or
(2)	place or authorize the placement of solid waste in a
landfill, surface impoundment, waste pile, injection well, or
land treatment facility over such aquifer or zone.
This subsection may be enforced under sections 309 (a) and (b) of the
Federal Water Pollution Control Act. For purposes of section 309(c)
of such Act, a violation of this subsection shall be considered a
violation of section 301 of such Act
(d)	Study of Shortages of Skilled Personnel.—The Comptroller
General shall study the problem of shortages of skilled personnel in
the Environmental Protection Agency to carry out response actions
under CERCLA. In particular the Comptroller General shall study—
(1)	the types of skilled personnel needed for response actions
for which there are shortages in the Environmental Protection
Agency,
(2)	the extent of such shortages,
(3)	pay differential between the public and private sectors for
the skilled positions involved in response actions,
(4)	the extent to which skilled personnel of Federal and State
governments involved in response actions are leaving their
positions for employment in the private sector,
(5)	the success of programs of the Department of Defense and
the Office of Personnel Management in retaining skilled person-
nel. and
(6)	the types of training required to improve the skills of
employees carrying out response actions.
The Comptroller General shall complete the study required by this
subsection and submit a report on the results thereof to Congress
not later than July 1,1987.
(e)	State Requirements Not Applicable to Certain Trans-
fers.—No State or local requirement shall apply to the transfer and
disposal of any hazardous substance or pollutant or contaminant
from a facility at which a release or threatened release has occurred
to a facility for which a final permit under section 3005(a) of the
Solid Waste Disposal Act is in effect if the following conditions
apply—

-------
EL R. 2005—45
(1)	Such permit was issued after January 1, 1983, and before
November 1,1984.
(2)	The transfer and disposal is carried out pursuant to a
cooperative agreement between the Administrator" and the
State.
(3)	The facility at which the release or threatened release has
occurred is identified as the McColl Site in Fullerton. California.
The terms used in this section shall have the same meaning as when
used in title 1 of CERCLA.
(f)	Study of Lead Poisoning in Children.—(1) The Administrator
of the Agency for Toxic Substances and Disease Registry shall, in
consultation with the Administrator of the Environmental Protec-
tion Agency and other officials as appropriate, not later than
March 1, 1987, submit to the Congress, a report on the nature and
extent of lead poisoning in children from environmental sources.
Such report shall include, at a minimum, the following information—
(A)	an estimate of the total number of children, arrayed
according to Standard Metropolitan Statistical Area or other
appropriate geographic unit, exposed to environmental sources
of lead at concentrations sufficient to cause adverse health
effects;
(B)	an estimate of the total number of children exposed to
environmental sources of lead arrayed according to source or
source types;
(C)	a statement of the long term consequences for public
health of unabated exposures to environmental sources of lead
and including but not limited to, diminution in intelligence,
increases in morbidity and mortality; and
(D)	methods and alternatives available for reducing exposures
of children to environmental sources of lead.
(2)	Such report shall also score and evaluate specific sites at which
children are known to be exposed to environmental sources of lead
due to releases, utilizing the Hazard Ranking system of the National
Priorities List.
(3)	The costs of preparing and submitting the report required by
this section shall be borne by the Hazardous Substance Superfund
established under subchapter A of chapter 98 of Internal Revenue
Code of 1954.
(g)	Federally Licensed Dam.—For purposes of CERCLA in the
case of the Mill town Dam in the State of Montana licensed under
part 1 of the Federal Power Act and designated as FERC license
number 2543-004, if a hazardous substance, pollutant, or
contaminant—
(1)	has been released into the environment upstream of the
dam, and
(2)	has subsequently come to be located in the reservoir
created by such dam
notwithstanding section 101(20) of such Act, the term "owner or
. operator" does not include the owner or operator of the nam unless
such owner or operator is a person who would otherwise be liable for
such release or threatened release under section 107 of such Act.
(n) Community Relocation at Times Beach Site.—For purposes
of any Missouri dioxon site at which a temporary or permanent
relocation decision has been made, or is under active consideration,
by the Administrator as of the enactment of this Act, the terms
"remove" and "removal" as used in CERCLA shall be deemed to
include the costs of permanent relocation of residents where it is

-------
H. R. 2005—46
determined that such permanent relocation is cost effective or may
be necessary to protect health or welfare. In the case of a business
located in an area of evacuation or relocation at such facility, such
terms may also include the payment of those installments of prin-
cipal and interest on business debt which accrue between the dace of
evacuation or temporary relocation and 30 days following the date
that permanent relocation is actually accomplished or, if permanent
relocation is formally rejected as the appropriate response, the date
on which evacuation or temporary relocation ceases. In the case of
an individual unemployed as a result of such evacuation or reloca-
tion, such terms may also include the provision of assistance iden-
tical to that authorized by sections 407, 408, and 409 of the Disaster
Relief Act of 1974; except that the costs of such assistance shall be
paid from the Trust Fund established under amendments made to
the Internal Revenue Code of 1954 by this Act. Section 104(cXl) of
CERCLA shall not apply to obligations from the Fund for perma-
nent relocation under this paragraph.
(i) Limited Waivers in State of Illinois.—
(1)	Mobile incinerators.—In the case of remedial actions
specifically involving mobile incinerator units in the State of
Illinois, if such remedial actions are undertaken by the State
under the authority of a State Superfimd law or equivalent
authority, the State may, with the approval of the Adminis-
trator, waive any permit requirement under subtitle C of the
Solid Waste Disposal Act which would be otherwise applicable
to such action to the extent that the following conditions are
met:
(A)	No transfer.—The incinerator does not involve the
transfer of a hazardous substance or pollutant or contami-
nant from the facility at which the release or threatened
release occurs to an offsite facility.
(B)	Remedial action.—The remedial action provides each
of the following:
(i)	Changes in the character or composition of the
hazardous substance or pollutant or contaminant con-
cerned so that it no longer presents a risk to public
health.
(ii)	Protection against accidental emissions during
operation.
(iii)	Protection of public health considering the multi-
media impacts of the treatment process.
{O Public participation.—The State provides proce-
dures for public participation regarding the response action -
which are at least equivalent to the level of public partici-
pation procedures applicable under CERCLA and under the
Solid Waste Disposal Act.
(2)	Effect of waiver.—The waiver of any permit require-
ment under this subsection shall not be construed to waive any
standard or level of control which—
(A)	is applicable to any hazardous substance or pollutant
or contaminant involved in the remedial action; and
(B)	would otherwise be contained in the permit.
Such waiver of any permit requirement under subtitle C of the
Solid Waste Disposal Act shall only apply to the extent that the
facility or remedial action involves the onsite treatment with a
mobile incineration unit of waste present at such site. The
waiver shall not apply to any other regulated or potentially

-------
H. R. 2005—47
ff
regulated activity, including the use of the mobile incineration
unit for actions not authorized by the State.
(3) Expiration of authority.—The authority of this subsec-
tion shall terminate at the end of 3 years, unless the State
demonstrates, to the satisfaction of the 'Administrator, that the
operation of mobile incinerators in the State has sufficiently
protected public health and the environment and is consistent
with the criteria required for a permit under subtitle C of the
Solid Waste Disposal Act.
(j) Study of Joint Use of Trucks.—
(1)	Study.—The Administrator, in consultation with the Sec-
retary of Transportation, shall conduct a study of problems
associated with the use of any vehicle for purposes other than
the transportation of hazardous substances when that vehicle is
used at other times for the transportation of hazardous sub-
stances. At a minimum, the Administrator shall consider—
(A) whether such joint use of vehicles should be
prohibited, and
IB) whether, if such joint use is permitted, special safe-
guards should be taken to minimise threats to public health
and the environment.
(2)	Report.—The Administrator shall submit a report,.along
with recommendations, to Congress on the results of the study
conducted under paragraph (.1) not later than 180 days after the
date of the enactment of this Act
(k) Radon Assessment and Mitigation.—
(1)	National assessment of radon gas.—No later than one
year after the enactment of this Act, the Administrator shall
submit to the Congress a report which shall, to the extent
possible—
(A)	identify 'the locations in the United States where
radon is found in structures where people normally live or
work, including educational institutions;
(B)	assess the levels of radon gas that are present in such
structures;
(C)	determine the level of radon gas and radon daughters
which poses a threat to human health and assess for each
location identified under subparagraph (A) the extent of the
threat to human health;
(D)	determine methods of reducing or eliminating the
threat to human health of radon gas and radon daughters;
and
(£) include guidance and public information materials
based on the findings or research of mitigating radon.
(2)	Radon mitigation demonstration program.—
(A)	Demonstration program.—The Administrator shall
conduct a demonstration program to test methods and tech-
nologies of reducing or eliminating radon gas and radon
daughters where it poses a threat to human health. The
Administrator shall take into consideration any demonstra-
tion program underway in the Reading Prong of Pennsylva-
nia, New Jersey, and New York and at other sites prior to
enactment. The demonstration program under this section
shall be conducted in the Reading Prong, and at such other
sites as the Administrator considers appropriate.
(B)	Annual reports.—The Administrator shall submit
reports not later than February 1 - of each year

-------
H.R.2005—48
(beginning February 1, 1987) on the status of the dem-
onstration program carried out under this subsection and
on any such demonstration program initiated prior to
enactment.
(C) Liability.—Liability, if any, for persons undertaking
activities pursuant to the radon mitigation demonstration
program authorized under this subsection shall be deter-
mined under principles of existing law.
(3) Construction of section.—Nothing in this subsection
shall be construed to authorize the Administrator to carry out
any regulatory program or any activity other than research,
development, and related reporting, information dissemination,
and coordination activities specified in this subsection. Nothing
in paragraph (1) or (2) shall be construed to limit the authority
of the Administrator or of any other agency or instrumentality
of the United States under any other authority of law.
(1) Gulf Coast Hazardous Substance Research, Development,
and Demonstration Center.—
(1)	Establishment of hazardous substance research,
development, and demonstration center.—The Adminis-
trator shall establish a hazardous substance research, develop-
ment, and demonstration center (hereinafter in this subsection
referred to as the "Center") for the purpose of conducting
research to aid in more effective hazardous substance response
and waste management throughout the Gulf Coast.
(2)	Purposes of the center.—The Center shall carry out a
program of research, evaluation, testing, development, and dem-
onstration of alternative or innovative technologies which may
be utilized in response actions or in normal handling of hazard-
ous wastes to achieve better protection of human health and the
environment.
(3)	Operation of center.—(A) For purposes of operating the
Center, the Administrator is authorized to enter into contracts
and cooperative agreements with, and make grants to, a univer-
sity related institute involved with the improvement of waste
management. Such institute shall be located in Jefferson
County, Texas.
(B) The Center shall be authorized to make grants, accept
contributions, and enter into agreements with universities lo-
cated in the States of Texas, Louisiana, Mississippi, Alabama,
and Florida in order to carry out the purposes of the Center.
(4)	Authorization of appropriations.—There are authorized
to be appropriated to the Administrator for purposes of carrying
out this subsection for fiscal years beginning after Septem-
ber 30,1986, not more than $5,000,000.
(m) Radon Protection at Current National Priorities List
Sites.—It is the sense of the Congress that the President, in
selecting response action for facilities included on the National
Priorities List published under section 105 of the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980
because of the presence of radon, is not required by statute or
regulations to use fully demonstrated methods, particularly chose
involving the offsite transport and disposition of contaminated
material, but may use innovative or alternative methods which
protect human health and the environment in a more cost-effective
manner.
(ni Spill Control Technology.—

-------
H. R. 2005—49
(1)	Establishment of program.—Within 180 days of enact-
ment of this subsection, the Secretary of the United States
Department of Energy is directed to carry out a program of
testing and evaluation of technologies whicn may be utilized in
responding to liquefied gaseous and other hazardous substance
spills at the Liquefied Gaseous Fuels Spill Test Facility that
threaten public health or the environment.
(2)	Technology transfer.—In carrying out the program
established under this subsection, the Secretary shall conduct a
technology transfer program that, at a minimum—
(A) documents and archives spill control technology;
(6) investigates and analyzes significant hazardous spill
incidents;
(C)	develops and provides generic emergency action plans;
(D)	documents and archives spill test results;
(E)	develops emergency action plans to respond to spills;
(F)	conducts training of spill response personnel; and
(G)	establishes safety standards for personnel engaged in
spill response activities.
(3)	Contracts and grants.—The Secretary is directed to
enter into contracts and grants with a nonprofit organization in
Albany County, Wyoming, that is capable of providing the
necessary technical support and which is involved in environ-
mental activities related to such hazardous substance related
emergencies.
(4)	Use of site.—The Secretary shall arrange for the use of
the Liquefied Gaseous Fuels Spill Test Facility to carry out the
provisions of this subsection.
(o) Pacific Northwest Hazardous Substance Research, Devel-
opment, and Demonstration Center.—
(1)	Establishment.—The Administrator shall establish a
hazardous substance research, development, and demonstration
center (hereinafter in this subsection referred to as the
"Center") for the purpose of conducting research to aid in
more effective hazardous substance response in the Pacific
Northwest.
(2)	Purposes of center.—The Center shall carry out a pro-
gram of research, evaluation, testing, development, and dem-
onstration of alternative or innovative technologies which may
be utilized in response actions to achieve more permanent
protection of human health and welfare and the environment
(3)	Operation of center.—
(A) Nonprofit entity.—For the purposes of operating the
Center, the Administrator is authorized to enter into con-
tracts and cooperative agreements with, and make grants
to, a nonprofit private entity as defined in section 201(i) of
Public Law 96-517 which entity shall agree to provide the
basic technical and management personnel. Such nonprofit
private entity shall also agree to provide at least two
permanent research facilities, one of which shall be located
in Benton County, Washington, and one of which shall be
located in Clallam County, Washington.
(6) Authorities.—The Center shall be authorized to
make grants, accept contributions, and enter into agree-
ments with universities located in the States of Washing-
ton, Oregon, Idaho, and Montana in order to carry out the
purposes of the Center.

-------
H. R. 2005—50
(4)	Hazardous waste research at the hanford site.—
(A)	Interagency agreements.—The Administrator and
the Secretary of Energy are authorized to enter into inter-
agency agreements with one another for the purpose
of providing for research, evaluation, testing, develop-
ment, and demonstration into alternative or innovative
technologies to characterize and assess the nature and
extent of hazardous waste (including radioactive mixed
waste) contamination at the Hanford site, in the State of
Washington.
(B)	Funding.—There is authorized to be appropriated to
the Secretary of Energy for purposes of carrying out this
paragraph for fiscal years beginning after September 30,
1986. not more than So,000,000. All sums appropriated
under this subparagraph shall be provided to the Adminis-
trator by the Secretary of Energy, pursuant to the inter-
agency agreement entered, into under subparagraph (A), for
the purpose of the Administrator entering into contracts
and cooperative agreements with, and making grants to,
the Center in order to carry out the research, evaluation,
testing, development, and demonstration described in para-
graph (1).
(5)	Authorization of appropriations.—There is authorized
to be appropriated to the Administrator for purposes of carrying
out this subsection (other than paragraph (4)) for fiscal years
beginning after September 30, 1986, not more than S5.000.000.
(p) Silver Creek Tailings.—Effective with the date of enactment
of this Act, the facility listed in Group 7 in EPA National Priorities
List Update =4 (50 Federal Register. 37956, September 18. 1985), the
site in Park City, Utah, which is located on tailings from noncoal
mining operations, shall be deemed removed from the list of sites
recommended for inclusion on the National Priorities List, unless
the President determines upon site specific data not used in the
proposed listing of such facility, that the facility meets requirements
of the Hazard Ranking System or any revised Hazard Ranking
System.
SEC. 119. RESPONSE ACTION CONTRACTORS.
Title I of CERCLA is amended by adding the following new section
after section 118:
"SEC. 119. RESPONSE ACTION CONTRACTORS.
"(a),Liability of Response Action Contractors.—
"(1) Response action contractors.—A person who is a
response action contractor with respect to any release or threat-
ened release of a hazardous substance or pollutant or contami-
nant from a vessel or facility shall not be liable under this title
or under any other Federal law to any person for injuries, costs,
damages, expenses, or other liability (including but not limited
to claims for indemnification or contribution and claims by
third parties for death, personal injury, illness or loss of or
damage to property or economic loss; which results from such
release or threatened release.
"(2) Negligence, etc.—Paragraph (1) shall not apply in the
case of a release that is caused by conduct of the response action
contractor which is negligent, grossly negligent, or which con-
stitutes intentional misconduct.

-------
H. R. 2005—51
"(3) Effect on warranties; employer liability.—Nothing in
this subsection shall affect the liability of any person under any
warranty under Federal, State, or common law. Nothing in this
subsection shall affect the liability of an employer who is a
response action contractor to any employee of such employer
under any provision of law, including any provision of any law
relating to worker's compensation.
'\4> Governmental employees.—A state employee or an em-
ployee of a political subdivision -who provides services relating
to response action while acting within the scope of his authority
as a governmental-employee shall have the same exemption
from liability (subject to the other provisions of this section) as
is provided to the response action contractor under this section.
"(b) Savings Provisions.—
"(1) Liability of other persons.—The defense provided by
section 107(bx3) shall not be available to any potentially respon-
sible party with respect to any costs or damages caused by any
act or omission of a response action contractor. Except as
provided in subsection (aX4) and the preceding sentence, noth-
ing in this section shall affect the liability under this Act or
under any other Federal or State law of any person, other than
a response action contractor.
"(2) Burden of plaintiff.—Nothing in this section shall
affect the plaintiffs burden of establishing liability under t.his
title.
"(c) Indemnification.—
"(1) In general.—The President may agree to hold harmless
and indemnify any response action contractor meeting the
requirements of this subsection against any liability (including
the expenses of litigation or settlement) for negligence arising
out of the contractor's performance in carrying out response
action activities under thus title, unless such liability was caused
by conduct of the contractor which was grossly negligent or
which constituted intentional misconduct
"(2) Applicability.—This subsection shall apply only with
respect to a response action carried out under written agree-
ment with—
"(A) the President;
"(B) any Federal agency;
"(C) a State or political subdivision which has entered
into a contract or cooperative agreement in accordance
with section 104(dXl) of this title; or
"(D) any potentially responsible party carrying out any
agreement under section 122 (relating to settlements) or
section 106 (relating to abatement).
"(3) Source of funding.—This subsection shall not be subject
to section 1301 or 1341 of title 31 of the United States Code or
section 3732 of the Revised Statutes (41 U.S.C. 11) or to section 3
of the Superfund Amendments and Reauthorization Act of 1986.
For purposes of section 111, amounts expended pursuant to this
subsection for indemnification of any response action contractor
• except with respect to federally owned or operated facilities)
shall be considered governmental response costs incurred pursu-
ant to section 104. If sufficient funds are unavailable in the
Hazardous Substance Superfund established under subchapter
A of chapter 98 of the Internal Revenue Code of 1954 to make
payments pursuant to such indemnification or if the Fund is

-------
H.R.2005—52
repealed, there are authorized to be appropriated such amounts
as may be necessary to make such payments.
"(4) Requirements.—An indemnification agreement may be
provided under this subsection only if the President determines
that each of the following requirements are met:
"(A) The liability covered by the indemnification agree-
ment exceeds or is not covered by insurance available, at a
fair and reasonable price, to the contractor at the time the
contractor enters into the contract to provide response
action, and adequate insurance to cover such liability is not
generally available at the time the response action contract
is entered into.
"(B) The response action contractor has made diligent
efforts to obtain insurance coverage from non-Federal
sources to cover such liability.
"(C) In the case of a response action contract covering
more than one facility, the response action contractor
agrees to continue to make such diligent efforts each time
the contractor begins , work under the contract at a new
facility.
"(5) Limitations.—
"(A) Liability covered.—Indemnification under this
subsection shall apply only to response action contractor
liability which results from a release of any hazardous
substance or pollutant or contaminant if such release arises
out of response action activities.
"(B) Deductibles and limits.—An indemnification agree-
ment under this subsection shall include deductibles and
shall place limits on the amount of indemnification to be
made available.
"(O Contracts with potentially responsible pasties.—
"(i) Decision to indemnify.—In deciding whether to
enter into an indemnification agreement with a re-
sponse action contractor carrying out a written con-
tract or agreement with any potentially responsible
party, the President shall determine an amount which
the potentially responsible party is able to indemnify
the contractor. The President may enter into such an
indemnification agreement only if the President deter-
mines that such amount of indemnification is inad-
equate to cover any reasonable potential liability of the
contractor arising out of the contractor's negligence in
performing the contract or agreement with such party.
The President shall make the determinations in the
preceding sentences (with respect to the amount and
the adequacy of the amount) Miring into account the
total net assets and resources of potentially responsible
parties with respect to the facility at the time of such
determinations.
"(ii) Conditions.—The President may pay a claim
under an indemnification agreement referred to in
clause (i) for the amount determined under clause (i)
only if the contractor has exhausted all administrative,
judicial, and common law claims for indemnification
against all potentially responsible parties participating
in the clean-up of the facility with respect to the Liabil-
ity of the contractor arising out of the contractor's

-------
H. R. 2005—53
negligence in performing the contract or agreement
with such party. Such indemnification agreement shall
require such contractor to pay any deductible estab-
lished under subparagraph (B) before the contractor
may recover any amount from the potentially respon-
sible party or under the indemnification agreement.
"(D"> RCRA faculties.—No owner or operator of a facility
regulated under the Solid Waste Disposal Act may be
indemnified under this subsection with respect to such
facility.
"(E) Persons retained or hired.—A person retained or
hired by a person described in subsection (eX2)(B) ahall be
eligible for indemnification under this subsection only if the
President specifically approves of the retaining or hiring of
such person.
"(6) Cost recovery.—For purposes of section 107, amounts
expended pursuant to this subsection for indemnification of any
person who is a response action contractor with respect to any
release or threatened release shall be considered a cost of
response incurred by the United States Government with re-
spen to such release.
"(7) Regulations.—The President shall promulgate regula-
tions for carrying out the provisions of this subsection. Before
promulgation of the regulations, the President shall develop
guidelines to carry out this section. Development of such guide-
lines shall include reasonable opportunity for public comment.
"(8) Study.—The Comptroller General shall conduct a study
in the fiscal year ending September 30,1989, on the application
of this subsection, including whether indemnification agree-
ments under this subsection are being used, the number of
claims that have been filed under such agreements, and the
need for this subsection. The Comptroller General shall report
the finding* of the study to Congress no later than Septem-
ber 30, 1989.
"(d) Exception.—The exemption provided under subsection (a)
and the authority of the President to offer indemnification under
subsection (c) shall not apply to any person covered by the provisions
of paragraph (1), (2), (3), or (4) of section 107(a) with respect to the
release or threatened release concerned if such person would be
covered by such provisions even if such person had not carried out
any actions referred to in subsection (e) of this section.
"(e) Definitions.—For purposes of this section—
"(1) Response action contract.—The term 'response action
contract' means any written contract or agreement entered into
by a response action contractor (as defined in paragraph (2XA)
of this subsection) with—
"(A) the President;
"(B) any Federal agency;
"(O a State or political subdivision which has entered
into a. contract or cooperative agreement in accordance
with section 104(dXl) of this Act; or
"(D) any potentially responsible party carrying out an
agreement under section 106 or 122;
to provide any remedial action under this Act at a facility listed
on the National Priorities List, or any removal under this Act,
with respect to any release or threatened release of a hazardous
substance or pollutant or contaminant from the facility or to

-------
H. R. 2005—54
provide any evaluation, planning, engineering, surveying and
mapping, design, construction, equipment, or any ancillary serv-
ices thereto for such facility.
"(2) Response action contractor.—The term 'response
action contractor' means—
"(A) any—
"(i) person who enters into a response action contract
with respect to any release or threatened release of a
hazardous substance or pollutant or contaminant from
a facility and is carrying out such contract: and
"(ii). person, public or nonprofit private entity,
conducting a field demonstration pursuant to section
311(b); and
"(B) any person who is retained or hired by a person
described in subparagraph (A) to provide any services relat-
ing to a response action.
"(3) Insurance.—The term 'insurance' means liability insur-
ance which is fair and reasonably priced, as determined by the
President, and which is made available at the time the contrac-
tor enters into the response action contract to provide response
action.
"ff) Competition.—Response action contractors and subcontrac-
tors for program management, construction management, architec-
tural and engineering, surveying and mapping, and related services
shall be selected in accordance with title IX of the Federal Property
and Administrative Services Act of 1949. The Federal selection
procedures shall apply to appropriate contracts negotiated by all
Federal governmental agencies involved in carrying out this Act.
Such procedures shall be followed by response action contractors
and subcontractors.".
SEC. 120. FEDERAL FACILITIES.
(a) In General.—Title I of CERCLA is amended by adding the
following new section after section 119:
"SEC. 120. FEDERAL FACILITIES.
"(a) Application of Act to Federal Government.—
"(1) In general.—Each department, agency, and instrumen-
tality of the United States (including the executive, legislative,
and judicial branches of government) shall be subject to, and
comply with, this Act in the same manner and to the same
extent, both procedurally and substantively, as any nongovern-
mental entity, including liability under section 107 of this Act.
Nothing in this section shall be construed to affect the liability
of any person or entity under sections 106 and 107.
"(2) Application of requirements to federal facilities.—
All guidelines, rules, regulations, and criteria which are ap-
plicable to preliminary assessments carried out under this Act
for facilities at which hazardous substances are located, ap-
plicable to evaluations of such facilities under the National
Contingency Plan, applicable to inclusion on the National Prior-
ities List, or applicable to remedial actions at such facilities
shall also be applicable to facilities which aire owned or operated
by a department, agency, or instrumentality of the United
States in the same manner and to the extent as such guidelines,
rules, regulations, and criteria axe applicable to other facilities.
No department, agency, or instrumentality of the United States

-------
H. R. 2005—55
may adopt or utilize any such guidelines, rules, regulations, or
criteria which are inconsistent with the guidelines, rules, regu-
lations, and criteria established by the Administrator under this
Act
"(3) Exceptions.—This subsection shall not apply to the
extent otherwise provided in this section with respect to ap-
plicable time periods. This subsection shall also not apply to any
requirements relating to bonding, insurance, or financial
responsibility. Nothing in this Act shall be construed to require
a State to comply with section 104(cX3) in the case of a facility
which is owned or operated by any department, agency, or
instrumentality of the United States.
"(4) State laws.—State laws concerning removal and re-
medial action, including State laws regarding enforcement,
shall apply to removal and remedial action at famiitiac owned or
operated by a department, agency, or instrumentality of the
United States when such facilities are not included on the
National Priorities List. The preceding sentence shall not apply
to the extent a State law would apply any standard or require-
ment to such facilities which is more stringent than .the stand-
ards and requirements applicable to facilities which are not
owned or operated by any such department, agency, or
instrumentality.
"(b) Nones.—Each department, agency, and instrumentality of
the United States shall add to the inventory of Federal agency
hazardous waste facilities required to be submitted under section
3016 of the Solid Waste Disposal Act (in addition to the information
required under section 3016(aX3) of such Act) information on
contamination from each facility owned or operated by the depart-
ment, agency, or instrumentality if such contamination affects
contiguous or adjacent piuperty owned by the department, agency,
or instrumentality or by any other person, including a description of
the monitoring data obtained.
"(c) Federal Agency Hazardous Waste Compliance Docket.—
The Administrator shall establish a special Federal Agency Hazard-
ous Waste Compliance Docket (hereinafter in this section referred to
as the 'docket') which shall contain each of the following:
"(1) All information submitted under section 3016 of the Solid
Waste Disposal Act and subsection (b) of this section regarding
any Federal facility and notice of each subsequent action taken
under this Act with respect to the facility.
"(2) Information submitted by each department, agency, or
instrumentality of the United States under section 3005 or 3010
of such Act.
"(3) Information submitted by the department, agency, or
instrumentality under section 103 of this Act
The docket shall be available for public inspection at reasonable
times. Six months after establishment of the docket and every 6
months thereafter, the Administrator shall publish in the Federal
Register a list of the Federal facilities which have been included in
the docket during the immediately preceding 6-month period. Such
publication shall also indicate where in the appropriate regional
office of the Environmental Protection Agency additional informa-
tion may be obtained with respect to any facility on the docket The
Administrator shall establish a program to provide information to
the public with respect to facilities which are included in the docket
under this subsection..

-------
H. R. 2005—56
"(d) Assessment and Evaluation.—Not later than 18 months
after the enactment of the Superfund Amendments and Reauthor-
ization Act of 1986, the Administrator shall take steps to assure that
a preliminary assessment is conducted for each facility on the
docket. Following such preliminary assessment, the Administrator
shall, where appropriate—
"(1) evaluate such facilities in accordance with the criteria
established in accordance with section 105 under the National
Contingency Plan for determining priorities among releases;
and
*'(2) include such facilities on the National Priorities List
maintained under such plan if the facility meets such criteria.
Such criteria shall be applied in the same manner as the criteria are
applied to facilities which are owned or operated by other persons.
Evaluation and listing under this subsection shall be completed not
later than 30 months after such date of enactment Upon the receipt
of a petition from the Governor of any State, the Administrator
shall make such an evaluation of any facility included in the docket.
"(e) Required Action by Department.—
"(1) RI/FS.—Not later than 6 months after the inclusion of
any facility on the National Priorities List, the department,
agency, or instrumentality which owns or operates such facility
shall, in consultation with the Administrator and appropriate
State authorities, commence a remedial investigation and fea-
sibility study for such facility. In the case of any facility which
is listed on such list before the date of the enactment of this
section, the department, agency, or instrumentality which owns
or operates such facility shall, in consultation with the Adminis-
trator and appropriate State authorities, commence such an
investigation and study for such facility within one year after
such date of enactment. The Administrator and appropriate
State authorities shall publish a timetable and deadlines for
expeditious completion of such investigation and study.
•'(2) Commencement of remedial action; interagency
agreement.—The Administrator shall review the results of
each investigation and study conducted as provided in para-
graph (1). Within 180 days hereafter, the head of the depart-
ment, agency, or instrumentality concerned shall enter into an
interagency agreement with the Administrator for the expedi-
tious completion by such department, agency, or instrumental-
ity of all necessary remedial action at such facility. Substantial
continuous physical onsite remedial action shall be commenced
at each facility not later than 15 months after completion of the
investigation and study. All such interagency agreements,
including review of alternative remedial action plans and selec-
tion of remedial action, shall comply with the public participa-
tion requirements of section 117.
\'(3) Completion of remedial actions.—Remedial actions at
facilities subject to interagency agreements under this section
shall be completed as expeditiously as practicable. Each agency
shall include in its annual budget submissions to the Congress a
review of alternative agency funding which could be used to
provide for the costs of remedial action. The budget submission
shall also include a statement of the hazard posed by the facility
to human health, welfare, and the environment and identify the
specific consequences of failure to begin and complete remedial
action.

-------
RR. 2005—57
"(4) Contents of agreement.—Each interagency agreement
under this subsection shall include, but shall not be limited to,
each of the following;
"(A) A review of alternative remedial actions and selec-
tion of a remedial action by the head of the relevant
department, agency, or instrumentality and the Adminis-
trator or. if unable to reach agreement on selection of a
remedial action, selection by the Administrator.
"(B) A schedule for the completion of each such remedial
action.
"(C) Arrangements for long-term operation and mainte-
nance of the facility.
"(5) Annual report.—Each department, agency, or
instrumentality responsible for compliance with this section
snail furnish an annual report to the Congress concerning its
progress in implementing the requirements of this section. Such
reports shall include, but shall not be limited to, each of the
following items:
"(A) A report on the progress in reaching interagency
agreements under this section.
"(B) The specific cost estimates and budgetary proposals
involved in each interagency agreement.
"(C) A brief summary of the public comments regarding
each proposed interagency agreement.
"(D) A description of the instances in which no agreement
was reached.
"(E) A report on progress in conducting investigations
and studies under paragraph (1).
"(F) A report on progress in conducting remedial actions.
"(G) A report on progress in conducting remedial action
at facilities which are not listed on the National Priorities
List.
With respect to instances in which no agreement was reached
within the required time period, the department, agency, or
instrumentality filing the report under this paragraph shall
include in such report an explanation of the reasons why no
agreement was reached. The annual report required by this
paragraph shall also contain a detailed description on a State-
by-State basis of the status of each facility subject to this
section, including a description of the hazard presented by each
facility, plans and schedules for initiating and completing re-
sponse action, enforcement status (where appropriate), and an
explanation of any postponements or failure to complete re-
sponse action. Such reports shall also be submitted to the
affected States.
"(6) Settlements with othes pasties.—If the Administrator,
in consultation with the head of the relevant department,
agency, or instrumentality of the United States, determines
that remedial investigations and feasibility studies or remedial
action will be done properly at the Federal facility by another
potentially responsible party within the deadlines provided in
paragraphs (1), (2), and (3) of this subsection, the Administrator
may enter into an agreement with such party under section 122
(relating to settlements). Following approval by the Attorney
General of any such agreement relating to a remedial action,
the agreement shall be entered in the appropriate United States
district court as a consent decree under section 106 of this Act.

-------
H. R. 2005—58
"(f) State and Local Participation.—The Administrator and
each department, agency, or instrumentality responsible for compli-
ance with this section shall afford to relevant State and local
officials the opportunity to participate in the planning and selection
of the remedial action, inHmting but not limited to the review of all
applicable data as it becomes available and the development of
studies, reports, and action plans. In the case of State officials, the
opportunity to participate shall be provided in accordance with
section 121.
"(g) Transfer of Authorities.—Except for authorities which are
delegated by the Administrator to an officer or employee of the
Environmental Protection Agency, no authority vested in the
Administrator under this section may be transferred, by executive
order of the President or otherwise, to any other officer or employee
of the United States or to any other person.
"(h) Property Transferred by Federal Agencies.—
"(1) Notice.—After the last day of the 6-month period begin-
ning on the effective date of regulations under paragraph (2) of
this subsection, whenever any department, agency, or
instrumentality of the United States enters into any contract
for the sale or other transfer of real property which is owned by
the United States and on which' any hazanious substance was
stored for one year or more, known tn have been released, or
disposed of, the head of such department, agency, or instrumen-
tality shall include in such contract notice of the type and
quantity of such hazardous substance and notice of the time at
which such storage, release, or disposal took place, to the extent
such information is available on the basis of a complete search
of agency files.
"(2) Form of notice; regulations.—Notice under this subsec-
tion shall be provided in such form and manner as may be
provided in regulations promulgated by the Administrator. As
promptly as practicable after the enactment of this subsection
but not later than 18 months after the date of such enactment,
and after consultation with the Administrator of the General
Services Administration, the Administrator shall promulgate
regulations regarding the notice required to be provided under
this subsection.
"(3) Contents of certain deeds.—After the last day of the 6-
month period beginning on the effective date of regulations
under paragraph (2) of this subsection, in the case of any real
property owned by the United States on which any hazardous
substance was stored for one year or more, known to have been
released, or disposed of, each deed entered into for the transfer
of such property by the United States to any other person or
entity shall contain—
"(A) to the extent such information is available on the
basis of a complete search of agency files—
"(i) a notice of the type and quantity of such hazard-
ous substances,
"(ii) notice of the time at which such storage, release,
or disposal took place, and
"(iii) a description of the remedial action taken, if
any, and
"(B) a covenant warranting that—
"(i) all remedial action necessary to protect human
health and the environment with respect to any such

-------
H. R. 2005—59
substance remaining on the property has been taken
before the date of such transfer, and
"(ii) any additional remedial action found to be nec-
essary after the date of such transfer shall be con-
ducted by the United States.
The requirements of subparagraph (B) shall not apply in any
case in which the person or entity to whom the property is
transferred is a potentially responsible party with respect to
such real property.
"(i) Obligations Under Solid Waste Disposal Act.—Nothing in
this section shall affect or impair the obligation of any department,
agency, or instrumentality of the United States to comply with any
requirement of the Solid Waste Disposal Act (including corrective
. action requirements).
"(j) National Security.—
"(1) Site specific presidential orders.—The President may
issue such orders regarding response actions at any specified
site or facility of the Department of Energy or the Department
of Defense as may be necessary to protect the national security
interests of the United States at that site or facility. Such orders
may include, where necessary to protect such interests, an
exemption from any requirement contained in this title or
under title HI of the Superfund Amendments and Reauthoriza-
tion Act of 1986 with respect to the site or facility concerned.
The President shall notify the Congress within 30 days of the
issuance of an order under this paragraph providing for any
such exemption. Such notification shall include a statement of
the .reasons for the granting of the exemption. An exemption
under this paragraph shall be for a specified period which may
not exceed one year. Additional exemptions may be granted,
each upon the President's issuance of a new order under this
paragraph for the site or facility concerned. Each such addi-
tional exemption shall be for a specified period which may not
exceed one year. It is the intention of the Congress that when-
ever an exemption is issued under this paragraph the response
action shall proceed as expeditiously as practicable. The Con-
gress shall be notified periodically of the progress of any re-
sponse action with respect to which an exemption has been
issued under this paragraph. No exemption shall be granted
under this paragraph due to lack of appropriation nwl«»«re the
President shall have specifically requested such appropriation
as a part of the budgetary process and the Congress shall have
failed to make available such requested appropriation.
"(2) Classified information.—Notwithstanding any other
provision of law, all requirements of the Atomic Energy Act and
all Executive orders concerning the handling of restricted data
and national security information, including 'need to know'
requirements, shall be applicable to any grant of access to
classified information under the provisions of this Act or under
title m of the Superfund Amendments and Reauthorization Act
of 1986.".
(b) Limited Grandfather.—Section 120 of CERCLA shall not
apply to any response action or remedial action for which a plan is
under development by the Department of Energy on the date of
enactment of this Act with respect to facilities—
(1) owned or operated by the United States and subject to the
jurisdiction of such Department;

-------
H.R.2006—60
(2)	located in St Charles and St Louis counties, Missouri, or
the city of St Louis, Missouri, and
(3)	published in the National Priorities List
In preparing such plans, the Secretary of Energy shall consult with
the Administrator of the Environmental Protection Agency.
SEC 121. CLEANUP STANDARDS.
(a) Amendment of CERCLA.—Title I of CERCLA is amended by
adding the following new section after section 120:
"SEC. 121. CLEANUP STANDARDS.
"(a) Selection of Remedial Action.—The President shall select
appropriate remedial actions determined to be necessary to be
carried out under section 104 or secured under section 106 which are
in accordance with this section and, to the extent practicable, the
national contingency plan, and which provide for cost-effective re-
sponse. In evaluating the cost effectiveness of proposed alternative
remedial actions, the President shall take into account the total
short- and long-term costs of such actions, including the costs of
operation and maintenance for the entire period during which such
activities will be required.
."(b) General Rules.—(1) Remedial actions in which treatment
which permanently and significantly reduces the volume, toxicity or
mobility of the hazardous substances, pollutants, and contaminants
is a principal element are to be preferred over remedial actions not
involving such treatment The ofisite transport and disposal of
hazardous substances or contaminated materials without such treat-
ment should be the least favored alternative remedial action where
practicable treatment technologies are available. The President
shall conduct an assessment of permanent solutions and alternative
treatment technologies or resource recovery technologies that, in
whole or in part will result in a permanent and significant decrease
in the toxicity, mobility, or volume of the hazardous substance,
pollutant or contaminant. In rnairing such assessment the Presi-
dent shall specifically address the long-term effectiveness of various
alternatives. In assessing alternative remedial actions, the President
shall, at a minimum, take into account*
"(A) the long-term uncertainties associated with land
disposal;
"(B) the goals, objectives, and requirements of the Solid Waste
Disposal Act;
"(C) the persistence, toxicity, mobility, and propensity
to	into of such hazardous substances their
constituents;
"(D) short- and long-term potential for adverse health effects
from human exposure;
"(E) long-term maintenance costs;
"(F) the potential for future remedial action costs if the
alternative remedial action in question were to fail; and
"(G) the potential threat to human health and the environ-
ment associated with excavation, transportation, and reciisposal
or containment
The President shall select a remedial action that is protective of
human health and the environment that is cost effective, and that
utilizes permanent solutions and alternative treatment technologies
or resource recovery technologies to the maximum extent prac-
ticable. If the President selects a remedial action not appropriate for

-------
H. R. 2005—61
a preference under this subsection, the President shall publish an
explanation as to why a remedial action involving such reductions
was not selected.
"(2) The President may select an alternative remedial action
meeting the objectives of this subsection whether or not such action
has been achieved in practice at any other facility or site that has
similar characteristics. In wwifiwp such a selection, the President
may take into account the degree of support for such remedial
action by parties interested in such site.
"(c) Review.—If the President selects a remedial action that
results in any hazardous substances, pollutants, or contaminants
remaining at the site, the President shall review such remedial
action no less often than each 5 years after the initiation of such
remedial action to assure that human health and the environment
are being protected by the remedial action being implemented. In
addition, if upon such review it is the judgment of the President that
action is appropriate at such site in accordance with section 104 or
106, the President shall take or require such action. The President
shall report to the Congress a list of facilities for which such review
is required, the results of all such reviews, and any actions taken as
a result of such reviews.
"(d) Degree op Cleanup.—(1) Remedial actions selected under
this section or otherwise required or agreed to by the President
under this Act shall attain a degree of cleanup of hazardous sub-
stances, pollutants, and contaminants released into the environment
and of control of further release at a minimum which assures
protection of human health and the environment. Such remedial
actions shall be relevant and appropriate under the circumstances
presented by the release or threatened release of such substance,
pollutant, or contaminant.
"(2XA) With respect to any hazardous substance, .pollutant or
contaminant that will remain oosite, if—
"(i) any standard, requirement, criteria, or limitation under
any Federal environmental law, including, but not limited to,
the Toxic Substances Control Act, the Safe Drinking Water Act,
the Clean Air Act, the Clean Water Act, the Marine Protection,
Research and Sanctuaries Act, or the Solid Waste Disposal Act;
or
"(ii) any promulgated standard, requirement, criteria, or
limitation under a State environmental or facility siting law
that is more stringent than any Federal standard, requirement,
criteria, or limitation, including each such State standard,
requirement, criteria, or limitation contained in a program
approved, authorized or delegated by the Administrator under a
statute cited in subparagraph (A), and that has been identified
to the President by the State in a timely manner,
is legally applicable to the hazardous substance or pollutant or
contaminant concerned or is relevant and appropriate under the
circumstances of the release or threatened release of such hazardous
substance or pollutant or contaminant, the remedial action selected
under section 104 or secured under section 106 shall require, at the
completion of the remedial action, a level or standard of control for
such hazardous substance or pollutant or contaminant which at
least attains such legally applicable or relevant and appropriate
standard, requirement, criteria, or limitation. Such remedial action
shall require a level or standard of control which at least attains
MaTimnm Contaminant Level Goals established under the Safe

-------
H.K.2005—62
Drinking Water Act and water quality criteria established under
section 304 or 303 of the Clean Water Act, where such goals or
criteria are relevant and appropriate under the circumstances of the
release or threatened release.
"(BXi) In determining whether or not any water quality criteria
under the Clean Water Act is relevant and appropriate under the
circumstances of the release or threatened release, the President
shall consider the designated or potential use of the surface or
groundwater, the environmental media affected, the purposes for
which such criteria were developed, and the latest information
available.
"(ii) For the purposes of this section, a process for establishing
alternate concentration limits to those otherwise applicable for
hazardous constituents in groundwater under subparagraph (A) may
not be used to establish applicable standards under this paragraph if
the process assumes a point of human exposure beyond the bound-
ary of the facility, as defined at the conclusion of the remedial
investigation and feasibility study, except where—
"(I) there are known and projected points of entry of such
groundwater into surface water; and
"(II) on the basis of measurements or projections, there is or
will be no statistically significant increase of such constituents
from such groundwater in such surface water at the point of
entry or at any point where there is reason to believe accumula-
tion of constituents may occur downstream; and
"(HI) the remedial action includes enforceable measures that
will preclude human exposure to the contaminated ground-
water at any point between the facility boundary and all known
and projected points of entry of such groundwater into surface
water
then the assumed point of human exposure may be at such known
and projected points of entry.
"(CXi) Clause (ii) of this subparagraph shall be applicable only in
cases where, due to the President's selection, in compliance with
subsection (bXl), of a proposed remedial action which does not
permanently and significantly reduce the volume, toxicity, or mobil-
ity of hazardous substances, pollutants, or contaminants, the pro-
posed disposition of waste generated by or associated with the
remedial action selected by the President is land disposal in a State
referred to in clause (ii).
"(ii) Except as provided in clauses (iii) and (iv), a State standard,
requirement, criteria, or limitation (including any State siting
standard or requirement) which could effectively result in the state-
wide prohibition of land disposal of hazardous substances, pollut-
ants, or contaminants shall not apply.
"(iii) Any State standard, requirement, criteria, or limitation
referred to in clause (ii) shall apply where each of the following
conditions is met:
"(I) The State standard, requirement, criteria, or limitation is
of general applicability and was adopted by formal means.
"(E) The State standard, requirement, criteria, or limitation
was adopted on the basis of hydrologic, geologic, or other rel-
evant considerations and was not adopted for the purpose of
precluding onsite remedial actions or other land disposal for
reasons unrelated to protection of human health and the
environment.

-------
H.R.2005—63
"(HI) The State arranges for, and assures payment of the
incremental costs of utilizing, a facility for disposition of the
hazardous substances, pollutants, or contaminants concerned.
"(iv) Whore the remedial action selected by the President does not
conform to a State standard and the State has initiated a law suit
against the Environmental Protection Agency prior to May 1, 1986,
to seek to have the remedial action conform to such standard, the
President shall conform the remedial action to the State standard.
The State shall assure the availability of an ofEsite facility for such
remedial action.
"(3) In the case of any removal or remedial action involving the
transfer of any hazardous substance or pollutant or contaminant
ofEsite, such hazardous substance or pollutant or contaminant shall
only be transferred to a facility which is operating in compliance
with section 3004 and 3005 of the Solid Waste Disposal Act (or,
where applicable, in compliance with the Toxic Substances Control
Act or other applicable Federal law) and all applicable State
requirements. Such substance or pollutant or contaminant may be
transferred to a land disposal facility only if the President deter-
mines that both of the following requirements are met:
"(A) The unit to which the hazardous substance or pollutant
or contaminant is transferred is not releasing any hazardous
waste, or constituent thereof, into the groundwater or surface
water or soiL
"3) All such releases from other units at the facility are
being controlled by a corrective action program approved by the
Administrator under subtitle C of the Solid Waste Disposal Act.
The President shall notify the owner or operator of such facility of
determinations under this paragraph.
"(4) The President may select a remedial action meeting the
requirements of paragraph (1) that does not attain a level or stand-
ard of control at least equivalent to a legally applicable or relevant
and appropriate standard, requirement, criteria, or limitation as
required by paragraph (2) (including subparagraph (B) thereof), if
the President finds that—
"(A) the remedial action selected is only part of a total
remedial action that will attain such level or standard of control
when completed;
"(B) compliance with such requirement at that facility will
result in greater risk to human health and the environment
than alternative options;
"(O compliance with such requirements is technically imprac-
ticable from an engineering perspective;
"(D) the remedial action selected will attain a standard of
performance that is equivalent to that required under the
otherwise applicable standard, requirement, criteria, or limita-
tion, through use of another method or approach;
"(E) with respect to a State standard, requirement, criteria, or
limitation, the State has not consistently applied (or dem-
onstrated the intention to consistently apply) the standard,
requirement, criteria, or limitation in m*niinr circumstances at
other remedial actions within the State; or
"(F) in the case of a remedial action to be undertaken solely
under section 104 using the Fund, selection of a remedial action
that attains such level or standard of control will not provide a
balance between the need for protection of public health and
welfare and the environment at the facility under consider-

-------
H. R. 2005—64
ation, and the availability of amounts from the Fund to respond
to other sites which present or may present a threat to public
health or welfare or the environment, ta tring into consideration
the relative immediacy of such threats.
The President shall publish such finding*, together with an expla-
nation and appropriate documentation.
"(e) Permits and Enforcement.—(1) No Federal, State, or local
permit shall be required for the portion of any removal or remedial
action conducted entirely onsite, where such remedial action is
selected and carried out in compliance with this section.
"(2) A State may enforce any Federal or State standard, require-
ment, criteria, or limitation to which the remedial action is required
to conform under this Act in the United States district court for the
district in which the facility is located. Any consent decree shall
require the parties to attempt expeditiously to resolve disagree-
ments concerning implementation of the remedial action informally
with the appropriate Federal and State agencies. Where the parties
agree, the consent decree may provide for administrative enforce-
ment. Each consent decree shall also contain stipulated penalties for
violations of the decree in an amount not to exceed $25,000 per day,
which may be enforced by either the President or the State. Such
stipulated penalties shall not be construed to impair or affect the
authority of the court to order compliance with the specific terms of
any such decree.
"(f) State Involvement.—(1) The President shall promulgate
regulations providing for substantial and meaningful involvement
by each State in initiation, development and selection of remedial
actions to be. undertaken in that State. The regulations, at a mini-
mum, shall include each of the following:
"(A) State involvement in decisions whether to perform a
preliminary assessment and site inspection.
"(B) Allocation of responsibility for hazard ranking system
scoring.
"(O State concurrence in deleting sites from the National
Priorities List.
"(D) State participation in the long-term planning process for
all remedial sites within the State.
"(E) A reasonable opportunity for States to review and com-
ment on each of the following:
"(i) The remedial investigation and feasibility study and
all data and technical documents leading to its issuance.
"(ii) The planned remedial action identified in the re-
medial investigation and feasibility study.
"(iii) The engineering design following selection of the
final remedial action.
"(iv) Other technical data and reports relating to im-
plementation of the remedy.
"(v) Any proposed finding or decision by the President to
exercise the authority of subsection (dX4).
"(F) Notice to the State of negotiations with potentially
responsible parties regarding the scope of any response action
at a facility in the State and an opportunity to participate in
such negotiations and, subject to paragraph (2), be a party to
any settlement.
"(G) Notice to the State and an opportunity to comment or
the President's proposed plan for remedial action as well as on
alternative plans under consideration. The President's proposed

-------
H.R.2005—55
decision regarding the selection of remedial action shall be
accompanied by a response to the comments submitted by the
State, including an explanation regarding any decision under
subsection (d)(4) on compliance with promulgated State stand-
ards. A copy of such response shall also be provided to the State.
"(H) Prompt notice and explanation of each proposed action
to the State in which the facility is located.
Prior to the promulgation of such regulations, the President shall
provide notice to the State of negotiations with potentially respon-
sible parties regarding the scope of any response action at a facility
in the State, and such State may participate in such negotiations
and. subject to paragraph (2), any settlements.
"(2XA) This paragraph shall apply to remedial actions secured
under section 106. At least 30 days prior to the entering of any
consent decree, if the President proposes to select a remedial action
that does not attain a legally applicable or relevant and appropriate
standard, requirement, criteria, or limitation, under the authority of
subsection (d)(4), the President shall provide an opportunity for the
State to concur or not concur in such selection. If the State concurs,
the State may become a signatory to the consent decree.
"3) If the State does not concur in such selection, and the State
desires to have the remedial action conform to such standard,
requirement, criteria, or limitation, the State shall intervene in the
action under section 106 before entry of the consent decree, to seek
to have the remedial action so conform. Such intervention shall be a
matter of right The remedial action shall conform to such standard,
requirement, criteria, or limitation if the State establishes, on the
administrative record, that the finding of the President was not
supported by substantial evidence. If the court determines that the
remedial action shall conform to such standard, requirement, cri-
teria, or limitation, the remedial action shall be so modified and the
State may become a signatory to the decree. If the court determines
that the remedial action need not conform to such standard, require-
ment, criteria, or limitation, and the State pays or assures the
payment of the additional costs attributable to meeting such stand-
ard, requirement, criteria, or limitation, the remedial action shall be
so modified and the State shall become a signatory to the decree.
"(O The President may conclude settlement negotiations with
potentially responsible parties without State concurrence.
"(3)(A) This paragraph shall apply to remedial actions at facilities
owned or operated by a department, agency, or instrumentality of
the United States. At least 30 days prior to the publication of the
President's final remedial action plan, if the President proposes to
select a remedial action that does not attain a legally applicable or
relevant and appropriate standard, requirement, criteria, or limita-
tion, under the authority of subsection (dX4), the President shall
provide an opportunity for the State to concur or not concur in such
selection. If the State concurs, or does not act within 30 days, the
remedial action may proceed
"(B) If the State does not concur in such selection as provided in
subparagraph (A), and desires to have the remedial action conform
to such standard, requirement, criteria, or limitation, the State may
maintain an action as follows:
"(i) If the President has notified the State of selection of such
a remedial action, the State may bring an action within 30 days
of such notification for the sole purpose of determining whether
the finding of the President is supported by substantial evi-

-------
H. R. 2005—66
dence. Such action shall be brought in the United States district
court for the district in which the facility is located.
"(ii) If the State establishes, on the administrative record,
that the President's finding is not supported by substantial
evidence, the remedial action shall be modified to conform to
such standard, requirement, criteria, or limitation.
"(iii) If the State fails to establish that the President's finding
was not supported by substantial evidence and if the State pays,
within 60 days of judgment, the additional costs attributable to
meeting such standard, requirement, criteria, or limitation, the
remedial action shall be selected to meet such standard, require-
ment, criteria, or limitation. If the State fails to pay within 60
days, the remedial action selected by the President shall pro-
ceed through completion.
"(O Nothing in this section precludes, and the court shall not
enjoin, the Federal agency from taking any remedial action unre-
lated to or not inconsistent with such standard, requirement, cri-~
teria, or limitation.".		
(b) Effective Date.—With respect to section 121 of CERCLA, as
added by this section—
(1)	The requirements of section 121 of CERCLA shall not
apply to any remedial action for which the Record of Decision
(hereinafter in this section referred to as the "ROD") was
signed, or the consent decree was lodged, before date of enact-
ment.
(2)	If the ROD was signed, or the consent decree lodged,
within the 30-day period immediately following enactment of
the Act, the Administrator shall certify in writing that the
portion of the remedial action covered by the ROD or consent
decree complies to the marimiim extent practicable with section
121 of CERCLA.
Any ROD signed before enactment of this Act and reopened after
enactment of this Act to modify or supplement the selection of
remedy shall be subject to the requirements of section 121 of
CERCLA.
SEC. 122. SETTLEMENTS.
(a) New Section.—Title I of CERCLA is amended by adding the
following new section after section 121:
"SEC. 122. SETTLEMENTS.
"(a) Authority To Enter Into Agreements.—The President, in
his discretion, may enter into an agreement with any person (includ-
ing the owner or operator of the facility from which a release or
substantial threat of release emanates, or any other potentially
responsible person), to perform any response action (including any
action described in section 104(b)) if the President determines that
such action will be done properly by such person. Whenever prac-
ticable and in the public interest, as determined by the President,
the President shall act to facilitate agreements under this section
that are in the public interest and consistent with the National
Contingency Plan in order to expedite effective remedial actions and
minimiyp litigation. If the President decides not to use the proce-
dures in this section, the President shall notify in writing poten-
tially responsible parties at the facility of such decision and the
reasons why use of the procedures is inappropriate. A decision of the

-------
H. R. 2005—67
President to use or not to use the procedures in this section is not
subject to judicial review.
"(b) Agkeements With Pozxmtiazi.7 Responsible Pasties.—
MC1) Meats funding.—An agreement under this section ma;
provide that the President will reimburse the parties to the
agreement from the Fund, with interest, for certain costs of
actions under the agreement that the parties have agreed to
perform but which the President has agreed to finance. In any
case in which the President provides such reimbursement, the
President shaH make all reasonable efforts to recover the
amount of such reimbursement under section 10? or under
other relevant authorities.
"(2) Rsvxewasxuty.—The President's decisions regarding the
availability of fund financing1 under this subsection shall not be
subject to judicial review under subsection (d).
"(3) Retention of funds.—If, as part of any agreement, the
President will be carrying out any action and the parties will be
paying amounts to the President, the President may, notwith-
standing any other provision of law, retain and use such
amounts for purposes of carrying out the agreement
"(4) Future Obligation of funs.—In the case of a completed
remedial action pursuant to an agreement described in para-
graph (1), the Fund shall be subject to an obligation for subse-
quent remedial actions at the same facility but only to the
extent that such subsequent actions are necessary by reason of
the failure of the original remedial action. Such obligation shall
be in a proportion equal to, but not exceeding, the proportion
contributed by the Fund for the original remedial action. The
Fund's obligation for such future remedial action may be met
through Fund expenditures or through payment, following
settlement or enforcement action, by parties who were not
signatories to the original agreement.
"(c) Effect of Agreement.—
"(1) Liability.—Whenever the President has entered into an
agreement under this section, the liability to the United States
under this Act of each party to the agreement, including any
future liability to the United States, arising from the release or
threatened release that is the subject of the agreement shall be
limited as provided in the agreement pursuant to a covenant
not to sue in accordance with subsection (f). A covenant not to
sue may provide that future liability to the United States of a
settling potentially responsible party under the agreement may
be limited to the same proportion as that established in the
original settlement agreement. Nothing in this section shall
limit or otherwise affect the authority of any court to review in
the consent decree process under subsection Id) any covenant
not to sue contained in an agreement under this section. In
determining the extent to which the liability of parties to an
agreement shall be limited pursuant to a covenant not to sue,
the President.shall be guided by the principle that a more
complete covenant not to sue shall be provided for a more
permanent remedy undertaken by such parties.
"{2) Actions against other persons.—If an agreement has
been entered into under this section, the President may taice
any action under section 106 against any person who is not a
party to the agreement, once the period for submitting a pro-

-------
H. R. 2005—68
posal under subsection (eX2XB) has expired. Nothing in this
section shall be construed to affect either of the following:
"(A) The liability of any person under section 106 or 107
with respect to any costs or damages which are not included
in the agreement
"(B) The authority of the President to maintain an action
under this Act against any person who is not a party to the
agreement.
"(d) Enforcement.—
"(1) Cleanup agreements.—
"(A) Consent decree.—Whenever the President enters
into an agreement under this section with any potentially
responsible party with respect to remedial action under
section 106, following approval of the agreement by the
Attorney General, except as otherwise provided in the case
of certain administrative settlements referred to in subsec-
tion (g), the agreement shall be entered in the appropriate
United States district court as a consent decree. The Presi-
dent need not make any finding regarding an imminent
and substantial endangerment to the public health or the
environment in connection with any such agreement or
consent decree.
"(B) Effect.—The entry of any consent decree under this
subsection shall not be construed to be an acknowledgment
by the parties that the release or threatened release con-
cerned constitutes an imminent and substantial
endangerment to the public health or welfare or the
environment. Except as otherwise provided in the Federal
Rules of Evidence, the participation by any party in the
process under this section shall not be considered an admis-
sion. of liability for any purpose, and the fact of such
participation shall not be admissible in any judicial or
administrative proceeding, including a subsequent proceed-
ing under this section.
"(C) Structure.—The President may fashion a consent
decree so that the entering of such decree and compliance
with such decree or with any determination or agreement
made pursuant to this section shall not be considered an
admission of liability for any purpose.
"(2) Public participation.—
"(A) Filing op proposes judgment.—At least 30 days
before a final judgment is entered under paragraph il), the
proposed judgment shall be filed with the court.
"(B) Opportunity tor comment.—The Attorney General
gfrnil provide an opportunity to persons who are not named
as parties to the action to comment on the proposed judg-
at. The
any written comments, views, or allegations relating to the
proposed judgment. The Attorney General may withdraw
or withhold its consent to the proposed judgment if the
comments, views, and allegations concerning the judgment
disclose facts or considerations which indicate that,
the proposed judgment is inappropriate, improper, or
inadequate.
"(3) 104(b) agreements.—Whenever the President enters into
an agreement under this section with any potentially respon-
court.

-------
H. R. 2005—69
sible party with respect to action under section 104(b), the
President shall issue an order or enter into a decree setting
forth the obligations of such party. The United States district
court for the district in which the release or threatened release
occurs may enforce such order or decree.
"(e) Special Notice Procedures.—
"(1) Notice.—Whenever the President determines that a
period of negotiation under this subsection would facilitate an
agreement with potentially responsible parties for taking re-
sponse action (including any action described in section 104(b))
and would expedite remedial action, the President shall so
notify all such parties and shall provide them with information
concerning each of the following:
"(A) The names and addresses of potentially responsible
parties (including owners and operators and cither persons
referred to in section 107(a)), to the extent such information
is available.
"(6) To the extent such information is available, the
volume and nature of substances contributed by each poten-
tially responsible party identified at the facility.
"(C) A ranking by volume of the substances at the facil-
ity, to the extent such information is available.
The President shall make the information referred to in this
paragraph available in advance of notice under this paragraph
upon the request of a potentially responsible party in accord-
ance with procedures provided by the President. The provisions
of subsection (e) of section 104 regarding protection of confiden-
tial information apply to information provided under this para-
graph. Disclosure of information generated by the President
under this section to persons other than the Congress, or any
duly authorized Committee thereof, is subject to otter privileges
or protections provided by law, including (but not limited to)
those applicable to attorney work product Nothing contained in
this paragraph or in other provisions of this Act shall be
construed, interpreted, or applied to diminish the required
disclosure of information under other provisions of this or other
Federal or State laws.
"(2) Negotiation.—
"(A) Moratorium.—Except as provided in this subsec-
tion, the President may not commence action under section
104(a) or take any action under section 106 for 120 days
after providing notice and information under this subsec-
tion with respect to such action. Except as provided in this
subsection, the President may not commence a remedial
investigation and feasibility study under section 104(b) for
90 days after providing notice and information under this
subsection with respect to such action. The President may
commence any additional studies or investigations au-
thorized under section 104(b), including remedial dgaign
during the negotiation period.
"(B) Proposals.—Persons receiving notice and informa-
tion under paragraph (1) of this subsection with respect to
action under section 106 shall have 60 days from the date of
receipt of such notice to make a proposal to the President
for undertaking or financing the action under section 106.
Persons receiving notice and information under paragraph
(1) of this subsection with respect to action under section

-------
H. R. 2005—70
104(b) shall have 60 days from the date of receipt of such
notice to make a proposal to the President for undertaking
or financing the action under section 104(b).
"(C) Additional parties.—If an additional potentially
responsible party is identified during the negotiation period
or after an agreement has been entered into under this
subsection concerning a release or threatened release, the
President may bring the additional party into the negotia-
tion or enter into a separate agreement with such party.
"(3) Preliminary allocation of responsibility.—
"(A) In general.—The President shall develop guidelines
for preparing nonbinding preliminary allocations of respon-
sibility. In developing these guidelines the President may
include such factors as the President considers relevant,
such as: volume, toxicity, mobility, strength of evidence,
ability to pay, litigative risks, public interest consider-
ations, precedential value, and inequities and aggravating
factors. When it would expedite settlements under this
section and remedial action, the President may, after
completion of the remedial investigation and feasibility
study, provide a nonbinding preliminary allocation of
responsibility which allocates percentages of the total cost
of response among potentially responsible parties at the
facility.
"(B) Collection of information.—To collect information
necessary or appropriate for performing the allocation
under subparagraph (A) or for otherwise implementing this
section, the President may by subpoena require the attend-
ance and testimony of witnesses and the production of
reports, papers, documents, answers to questions, and other
information that the President deems necessary. Witnesses
shall be paid the same fees and mileage that are paid
witnesses in the courts of the United States. In the event of
contumacy or failure or refusal of any person to obey any
such subpoena, any district court of the United States in
which venue is proper shall have jurisdiction to order any
such person to comply with such subpoena. Any failure to
obey such an order of the court is punishable by the court
as a contempt thereof.
"(C) Effect.—The nonbinding preliminary allocation of
responsibility shall not be admissible as evidence in any
proceeding, and no court shall have jurisdiction to review
the nonbinding preliminary allocation of responsibility. The
nonbinding preliminary allocation of responsibility, shall
not constitute an apportionment or other statement on the
divisibility of harm or causation.
"(D) Costs.—The costs incurred by the President in
producing the nonbinding preliminary allocation of respon-
sibility shall be reimbursed by the potentially responsible
parties whose offer is accepted by the President. Where an
offer under this section is not accepted, such costs shall be
considered costs of response.
"(E) Decision to reject offer.—Where the President, in
his discretion, has provided a nonbinding preliminary
allocation of responsioility and the potentially responsible
parties have made a substantial offer providing for response
to the President which he rejects, the reasons for the

-------
H. R. 2005—71
rejection shall be provided in a written explanation. The
President's decision to reject such an offer shall not be
subject to judicial review.
"(4) Failure to propose.—If the President determines that a
good faith proposal for undertaking or financing action under
section 106 has not been submitted within 60 days of the
provision of notice pursuant to this subsection, the President
may thereafter commence action under section 104(a) or take an
action against any person under section 106 of this Act. If the
President determines that a good faith proposal for undertaking
or financing action under section 104(b) has not been submitted
within 60 days after the provision of notice pursuant to this
subsection, the President may thereafter commence action
under section 104(b).
"(5) Significant threats.—Nothing in this subsection shall
limit the President's authority to undertake response or
enforcement action regarding a significant threat to public
health or the environment within the negotiation period estab-
lished by this subsection.
"(6) Inconsistent response action.—When either the Presi-
dent, or a potentially responsible party pursuant to an adminis-
trative order or consent decree under this Act has initiated a
remedial investigation and feasibility study for a particular
facility under this Act, no potentially- responsible party may
undertake any remedial action at the facility unless such re-
medial action has been authorized by the President.
"(f) Covenant Not To Sue.—
"CD Discretionary covenants.—The President may, in his
discretion, provide any person with a covenant not to sue
mnfgrninp any liability to the United States under this Act,
including future liability, resulting from a release or threatened
release of a hazardous substance addressed by. a remedial
action, whether that action is onsite or offsite, if each of the
following conditions is met:
"(A) The covenant'not to sue is in the public interest.
"(B) The covenant not to sue would expedite response
action consistent with the National Contingency Plan
under section 105 of this Act.
"(C) The person is in full compliance with a consent
decree under section 106 (including a consent decree en-
tered into in accordance with this section) for response to
the release or threatened release concerned.
"(D) The response action, has been approved by the
President.
"(2) Special covenants not to sue.—In the case of any
person to whom the President is authorized under paragraph (1)
of this subsection to provide a covenant not to sue, for the
portion of remedial action—
"(A) which involves the transport and secure disposition
offsite of hazardous substances in a facility meeting the
requirements of sections 3004 (c), (d), (e), If), ig). im), io), (p),
(u), and (v) and 3005(c) of the Solid Waste Disposal Act.
where the President has rejected a proposed remedial
action that is consistent with the National Contingency
Plan that does not include such offsite disposition aud has
thereafter required offsite disposition; or

-------
H. R. 2005—72
"(B) which involves the treatment of hazardous sub-
stances so as to destroy, eliminate, or permanently immo-
bilize the hazardous constituents of such substances, such
that, in the judgment of the President, the substances no
longer present any current or currently foreseeable future
significant risk to public health, welfare or the environ-
ment, no byproduct of the treatment or destruction process
presents any significant hazard to public health, welfare
or the environment, and all byproducts are themselves
treated, destroyed, or contained in a manner which assures
that such byproducts do not present any current or cur-
rently foreseeable future significant risk to public health,
welfare or the environment,
the President shall provide such person with a covenant not to
sue with respect to future liability to the United States under
this Act for a future release or threatened release of hazardous
substances from such facility, and a person provided such cov-
enant not to sue shall not be liable to the United States under
section 106 or 107 with respect to such release or threatened
release at a future time.
"(3) Requirement that remedial action be completed.—A
covenant not to sue concerning future liability to the United
States shall not take effect until the President certifies that
remedial action has been completed in accordance with the
requirements of this Act at the facility that is the subject of
such covenant
"(4) Factors.—In nraesmng the appropriateness of a covenant
not to sue under paragraph (1) and any condition to be included
in a covenant not to sue under paragraph (1) or (2), the Presi-
dent shall consider whether the covenant or condition is in the
public interest on the basis of such factors as the following;
"(A) The effectiveness and reliability of the remedy, in
light of the other alternative remedies considered for the
facility concerned.
"(B) The nature of the risks remaining at the facility.
"(C) The extent to which performance standards are in-
cluded in the order or decree.
"(D) The extent to which the response action provides a
complete remedy for the facility, including a reduction in
the hazardous nature of the substances at the facility.
"(E) The extent to which the technology used in the
response action is demonstrated to be effective.
"(F) Whether the Fund or other sources of funding would
be available for any additional remedial actions that might
eventually be necessary at the facility.
"(G) Whether the remedial action will be carried out. in
whole or in significant part, by the responsible parties
themselves.
"(5) Satisfactory performance.—Any covenant not to sue
under this subsection shall be subject to the satisfactory
performance by such party of its obligations under the agree-
ment concerned. .
"(6) Additional condition for future liability.—(A) Except
for the portion of the remedial action which is subject to a
covenant not to sue under paragraph (2) or under subsection ;g)
(relating to de minimis settlements), a covenant not to sue a
person concerning future liability to the United States shall

-------
H.R.2005—73
include an exception to the covenant that allows the President
to sue such person concerning future liability resulting from the
release or threatened release that is the subject of the covenant
where such liability arises out of conditions which are unknown
at the time the President certifies under paragraph (3) that
remedial action has been completed at the facility concerned.
"(B) In extraordinary circumstances, the President may deter-
mine, after assessment of relevant factors such as those referred
to in paragraph (4) and volume, toxicity, mobility, strength of
evidence, ability to pay, liugative risks, public interest consider-
ations, precedential value, and inequities and aggravating fac-
tors, not to include the exception referred to in subparagraph
(A) if other terms, conditions, or requirements of the agreement
containing the covenant not to sue are sufficient to provide all
reasonable assurances that public health and the environment
will be protected from any future releases at or from the
facility.
"(C) The President is authorized to include any provisions
allowing future enforcement action under section 106 or 107
that in the discretion of the President are necessary and appro-
priate to assure protection of public health, welfare, and the
environment.
"(g) De Minimis Settlements.—
"(1) Expedited final settlement.—Whenever practicable
and in the public interest, as determined by the President, the
President shall as promptly as possible reach a final settlement
with a potentially responsible party in an administrative or
civil action under section 106 or 107 if. such settlement involves
only a minor portion of the response costs at the facility con-
cerned and, in the judgment of the President, the conditions in
either of the following subparagraph (A) or (B) are met;
"(A) Both of the following are minimal in comparison to
other hazardous substances at the facility:
"(i) The amount of the hazardous substances contrib-
uted by that party to the facility.
"(ii) The toxic or other hazardous effects of the sub-
stances contributed by that party to the facility.
"(B) The potentially responsible party—
"(i) is the owner of the real property on or in which
the facility is located;
"(ii) did not conduct or permit the generation,
transportation, storage, treatment, or disposal of any
hazardous substance at the facility; and
"(iii) did not contribute to the release or threat of
release of a hazardous substance at the facility through
any action or omission.
This subparagraph (B) does not apply if the potentially
responsible party purchased the real property with actual
or constructive knowledge that the property was used for
the generation, transportation, storage, treatment, or dis-
posal of any hazardous substance.
"(2) Covenant not to sue.—The President may provide a
covenant not to sue with respect to the facility concerned to any
party who has entered into a settlement under this subsection
lining such a covenant would be inconsistent with the public
interest as determined under subsection (f).

-------
H.E.2005—74
"(3) Expedited agreement.—The President shall reach any
such settlement or grant any such covenant not to sue as soon
as possible after the President has available the information
necessary to reach such a settlement or grant such a covenant
"(4) Consent dscbee ob administrative order.—A settle-
ment under this subsection shall be entered as a consent decree
or embodied in an administrative order setting forth the terms
of the settlement. In the case of any facility where the total
response costs exceed $500,000 (excluding interest), if the settle-
ment is embodied as an administrative order, the order may be
issued only with the prior written approval of the Attorney
General If the Attorney General or his designee has not ap-
proved or disapproved the order within 30 days of this referral,
the order shall be deemed to be approved unless the Attorney
General and the Administrator have agreed to extend the time.
The district court for the district in which the release or threat-
ened release occurs may enforce any such administrative order.
"(5) Effect op agreement.—A party who has resolved its
liability to the United States under this subsection shall not be
liable for claims for contribution regarding matters addressed
in the settlement. Such settlement does not discharge any of the
other potentially responsible parties tin law its terms so provide,
but it reduces the potential liability of the others by the amount
of the settlement.
"(6) Settlements with otheh potentiallv responsible par-
ties.—Nothing in this subsection shall be construed to affect the
authority of the President to reach settlements with other
potentially responsible parties under this Act.
"(h) Cost Recovery Settlement Authority.—
"(1) Authority to settle.—The head of any department or
agency with authority to undertake a response action under this
Act pursuant to the national contingency plan may consider,
compromise, and settle a claim under section 107 for costs
incurred by the United States Government if the claim has not
been referred to the Department of Justice for further action. In
the case of any facility where the total response costs exceed
2500,000 (excluding interest), any claim referred to in the
preceding sentence may be compromised and settled only with
the prior written approval of the Attorney General.
"(2) Use op abbttsation.—Arbitration in accordance with
regulations promulgated under this subsection may be used as a
method of settling claims of the United States where the total
response costs for the facility concerned do not exceed $500,000
(excluding interest). After consultation with the Attorney Gen-
eral, the department or agency head may establish and publish
regulations for the use of arbitration or settlement under this
subsection.
"(3) Recovery op claims.—If any person fails to pay a claim
that has been settled under this subsection, the department or
agency head shall request the Attorney General to bring a civil
action in an appropriate district court to recover the amount of
such Havm, plus costs, attorneys' fees, and interest from the
date of the settlement. In such an action, the terms of the
settlement shall not be subject to review.
"(4) Claims for contribution.—A person who has resolved
its liability to the United States under this subsection shall not
be liable for claims for contribution regarding matters ad-

-------
H.R.2005—75
dressed in the settlement Such settlement shall not discharge
any of the other potentially liable persons unless its terms so
provide, but it reduces the potential liability of the others by the
amount of the settlement
"(i) Settlement Procedures.—
"(1) Publication in federal register.—At least 30 days
before any settlement (including any settlement arrived at
through arbitration) may become final under subsection (h), or
under subsection (g) in die case of a settlement embodied in an
administrative order, the head of the department or agency
which has jurisdiction over the proposed settlement shall pub-
lish in the Federal Register notice of the proposed settlement.
The notice shall identify the facility concerned and the parties
to the proposed settlement
"(2) Comment period.—For a 30-day period beginning on the
date of publication of notice under paragraph (1) of a proposed
settlement, the head of the department or agency which has
jurisdiction over the proposed settlement shall provide an
opportunity for persons who are not parties to the proposed
settlement to file written comments relating to the proposed
settlement
"(3) Consideration of comments.—The head of the depart-
ment or agency shall consider any comments filed under para-
graph (2) in determining whether or not to consent to the
proposed settlement and may withdraw or withhold consent to
the proposed settlement if such comments disclose facts or
considerations which indicate the proposed settlement is
inappropriate, improper, or inadequate.
"(j) Natural Resources.—
"(1) Notification of trustee.—Where a release or threat-
ened release of any hazardous substance that is the subject of
negotiations under this section may have resulted in damages to
natural resources under the trusteeship of the United States,
the President shall notify the Federal natural resource trustee
of the negotiations and shall encourage the participation of such
trustee in the negotiations.
"(2) Covenant not to sue.-—An agreement under this section
may contain a covenant not to sue under section 107(aX4XC) for
damages to natural resources under the trusteeship of the
United States resulting from the release or threatened release
of hazardous substances that is the subject of the agreement
but only if the Federal natural resource trustee has agreed in
writing to such covenant The Federal natural resource trustee
may agree to such covenant if the potentially responsible party
agrees to undertake appropriate actions necessary to protect
and restore the natural resources damaged by such release or
threatened release of hazardous substances.
"(k) Section Not Applicable to Vessels.—The provisions of this
section shall not apply to releases from a vessel.
"(1) Civil Penalties.—A potentially responsible party which is a
party to an administrative order or consent decree entered pursuant
to an agreement under this section or section 120 (relating to
Federal facilities) or which is a party to an agreement under section
120 and which fails or refuses to comply with any term or condition
of the order, decree or agreement shall be subject to a civil penalty
in accordance with section 109.

-------
H.IL2DG5—76
"(id) ArnxamararGMSBUL Pamaptss of Law.—In the case
of anuB&iecmnmi. other settlements under this section (indud-
ing covnantSMtiene), ao provision of this Act shall be construed
to pndnde «r riMv affect the applicability of general principles
nr	consent decrees
(b) Comanft-fieeaas 308 af CERCLA is n-rnmtioti by
the foQowmg M th* aid thereof: "If an administrative settlement
under ware 12 as the effect of limiting any person's right to
oho in MWiiUil— from any party to such settlement, and if the
effect of nea	would constitute a fairing without just
awipfnmiiue in linfotinn of the fifth amendment of the Constitu-
tion of the Uaind States, such person shall not be entitled, under
other lavs at ae United States, to recover compensation from the
United £*¦*— arndi	but in any such case, such limitation
an the ti ubua	ahnii be treated as having no
I LOCAL GOVEHNMENTS.
(a) TMe I of a is anipnrirrrf by adding the following after
m
~ LOCAL GOVERNMENTS.
purpose unit of local government
which is affected by.a release or threat-
tf facilhy may apply to the President for re-
' tins section.
7b):
"CD Tbhmb "¦¦ ¦»" ' measures.—The President is au-
thorised ti ZBBaorse local oummunity authorities for expenses
incurred Whs or after the enactment of the Superfund
. Haanthorization Act of 1986) in carrying our
measures necessary to prevent or miti-
:	or the environment associated with
the ictesse or threatened release of any hazardous substance or
pollutant or -»*.»»»»««»»+ Such measures may include, where
iilHsiijsiM, unity fencing to limit access, response to fires
and apkmam, mid other measures which require immediate
response *tbe local leveL
"13 Unt wuw not supplantxd.—Reimbursement under
das KeamdaBaat supplant local funds normally provided for
1c) Awsft-b amount of any reimbursement to any local
authority under nbsotion (bXl) may not exceed $25,000 for a single
The iiisisn ii mi in under this section with respect to a
single Jjriiily did be limited to the units of local government
having juzsdic&aD mt riw political subdivision in which the facil-
ity is located.
"(d) ¦¦m-JiriiniiinwHTmta authorized pursuant to this
9CC&OP shall ke it accordance with rules promulgated by the
Admimsnaeor wshm one year after the enactment of the
Hii|w i fi11ill *iiiMiiiniiin i niiil T?i mirtiiii ii itimi Act of 1986."
SEC 124. WnMBTBUJV hKl.
(a) Iir Gbobsl—TStle I of CEHCLA is amended by adding the
following new snas after secoon 123:

-------
H.R.2005—77
"SEC 124. METHANE RECOVERY.
"(a) In General.—In the case of a facility at which equipment for
the recovery or processing (including recirculation of condensate) of
methane has been installed, for purposes of this Act
"(1) The owner or operator of such equipment «h«il not be
considered an 'owner or operator', as defined in section 101(20),
with respect to such facility.
"(2) The owner or operator of such equipment shall not be
considered to have arranged for disposal or treatment of any
hazardous substance at such facility pursuant to section 107 of
this Act.
"(3) The owner or operator of such equipment shall not be
subject to any action under section 106 with respect to such
facility.
"(b) Exceptions.—Subsection (a) does not apply with respect to a
release or threatened release of a hazardous substance from a
facility described in subsection (a) if either of the following cir-
cumstances exist:
"(1) The release or threatened release was primarily caused
by activities of the owner or operator of the equipment de-
scribed in subsection (a).
"(2) The owner or operator of such equipment would be
covered by paragraph (1), (2), (3), or (4) of subsection (a) of
section 107 with respect to such release or threatened release if
he were not the owner or operator of such equipment
In the case of any release or threatened release referred to in
paragraph (1), the owner or operator of the equipment described in
subsection (a) shall be liable under this Act only for costs or dam-
ages primarily caused by the activities of such owner or operator.".
(b) Regulation Under the Solid Waste Disposal Act.—Unless
the Administrator of the Environmental Protection Agency promul-
gates regulations under subtitle C of the Solid Waste Disposal Act
addressing the extraction of wastes from landfills as part of the
process of recovering methane from such lnnHfillc, the owner and
operator of equipment used to recover methane from a landfill shall
not be deemed to be managing, generating, transporting, treating,
storing, or disposing of hazardous or liquid wastes within the mean-
ing of that subtitle. If the aqueous -or hydrocarbon phase of the
condensate or any other waste material removed from the gas
recovered from the landfill meets any of the characteristics identi-
fied under section 3001 of subtitle C of the Solid Waste Disposal Act,
the preceding sentence shall not applv and such condensate phase or
other waste material shall be deemed a hazardous waste under that
subtitle, and shall be regulated accordingly.
SEC. 125. CERTAIN SPECIAL STUDY WASTES.
Title 1 of CERCLA is amended by adding the following new section
after section 124:
"SEC 125. SECTION 3001(bK3XAXD WASTE.
"(a) Revision op Hazard Ranking System.—This section shall
apply only to facilities which are not included or proposed for
inclusion on the National Priorities List and which contain substan-
tial volumes of waste described in section 3001(bX3XAXi) of the Solid
Waste Disposal Act. As expeditiously as practicable, the President
shall revise the hazard ranking system in effect under the National
Contingency Plan with respect to such facilities in a manner which

-------
H. R. 2005—78
assures appropriate consideration of each of the following site-
specific characteristics of such facilities:
"(1) The quantity, toxicity, and concentrations of hazardous
constituents which are present in such waste and a comparison
thereof with other wastes.
"(2) The extent of, and potential for, release of such hazardous
constituents into the environment.
"(3) The degree of risk to human health and the environment
posed by such constituents.
"(b) Inclusion Prohibited.—Until the hazard ranking system is
revised as required by this section, the President may not include on
the National Priorities List any facility which contains substantial
volumes of waste described in section 3001(bX3XAXi) of the Solid
Waste Disposal Act on the basis of an evaluation made principally
on the volume of such waste and not on the concentrations of the
hazardous constituents of such waste. Nothing in this section shall
be construed to affect the President's authority to include any such
facility on the National Priorities List based on the presence of
other substances at such facility or to exercise any other authority
of this Act with respect to such other substances.".
SEC 126. WORKER PROTECTION STANDARDS.
(a> Promulgation.—Within one year after the date of the enact-
ment of this section, the Secretary of Labor shall, pursuant to
section 6 of the Occupational Safety and Health Act of 1970, promul-
gate standards for the health and safety protection of employees
engaged in hazardous waste operations.
(b) Proposed Standards.—The Secretary of Labor shall issue
proposed regulations on such standards which shall include, but
need not be limited to, the following worker protection provisions:
(1)	Site analysis.—Requirements for a formal hazard analy-
sis of the site and development of a site specific plan for worker
protection.
(2)	Training.—Requirements for contractors to provide initial
and routine training of workers before such workers are per-
mitted to engage in hazardous waste operations which would
expose them to toxic substances.
(3)	Medical surveillance.—A program of regular medical
examination, monitoring, and surveillance of workers engaged
in hazardous waste operations which would expose them to
toxic substances.
(4)	Protective equipment.—Requirements for appropriate
personal. protective equipment, clothing, and respirators for
work in hazardous waste operations.
(5)	Engineering controls.—Requirements for engineering
controls concerning the use of equipment and exposure of work-
ers engaged in hazardous waste operations.
(6)	Maximum exposure limits.—Requirements for maximum
exposure limitations for workers engaged in hazardous waste
operations, including necessary monitoring and assessment
procedures.
(7)	Informational program.—A program to inform workers
engaged in hazardous waste operations of the nature and degree
of toxic exposure likely as a result of such hazardous waste
operations.
(8)	Handling.—Requirements for the handling, transporting,
labeling, and disposing of hazardous wastes.

-------
H. B. 2005—79
(9)	New technology program.—A program for the introduc-
tion of new equipment or technologies that will maintain
worker protections.
(10)	Decontamination procedures.—Procedures for decon-
tamination.
(11)	Emergency response.—Requirements for emergency re-
sponse and protection of workers engaged in hazardous waste
operations.
(c)	Final Regulations.—Final regulations under subsection (a)
shall take effect one year after the date they are promulgated. In
promulgating final regulations on standards under subsection (a),
the Secretary of Labor shall include each of the provisions listed in
paragraphs (1) through (11) of subsection (b) unless the Secretary
determines that the evidence in the public record considered as a
whole does not support inclusion of any such provision.
(d)	Specific Training Standards.—
(1)	Offsite instruction; field experience.—Standards
promulgated under subsection (a) shall include training stand-
ards requiring that general site workers (such as equipment
operators, general laborers, and other supervised personnel)
engaged in hazardous substance removal or other activities
which expose or potentially expose such workers to hazardous
substances receive a minimum of 40 hours of initial instruction
off the site, and a minimum of three days of actual field
experience under the direct supervision of a trained, experi-
enced supervisor, at the time of assignment. The requirements
of the preceding sentence shall not apply to any general site
worker who has received the equivalent of such training. Work-
ers who may be exposed to unique or special hazards shall be
provided additional training.
(2)	Training or supervisors.—Standards promulgated under
subsection (a) shall include training standards requiring that
onsite managers and supervisors directly responsible for the
hazardous waste operations (such as foremen) receive the same
training as general site workers set forth in paragraph (1) of
this subsection and at least eight additional hours of specialized
training on manning hazardous waste operations. The require-
ments of the preceding sentence shall not apply to any person
who has received the equivalent of such training.
(3)	Certification; enforcement.—Such training standards
shall contain provisions for certifying that general site workers,
onsite managers, and supervisors have received the specified
training and shall prohibit any individual who has not received
the specified training from engaging in hazardous waste oper-
ations covered by the-standard.
(4)	Training of emergency response personnel.—Such
training standards set forth requirements for the training
of workers who are responsible for responding to hazardous
emergency irrigations who may be exposed to toxic substances in
carrying out their responsibilities.
(e)	Interim Regulations.—The Secretary of Labor shall issue
interim final regulations under this section within 60 days after the
enactment of this section which shall -provide no less protection
under this section for workers employed by contractors and emer-
gency response workers than the protections contained in the
Environmental Protection Agency Manual (1981) "Health and
Safety Requirements for Employees Engaged in Field Activities"

-------
H. R. 2005—80
and existing standards under the Occupational Safety and Health
Act of 1970 found in subpart C of part 1926 of title 29 of the Code of
Federal Regulations Such interim final regulations shall take effect
upon issuance and shall apply until final regulations become effec-
tive under subsection (c).
(f)	Coverage or Certain State and Local Employees.—Not later
than 90 days after the promulgation of final regulations under
subsection (a), the Administrator shall promulgate standards iden-
tical to those promulgated by the Secretary of Labor under subsec-
tion (a). Standards promulgated under this subsection shall apply to
employees of State and local governments in each State which does
not have in effect an approved State plan under section IS of the
Occupational Safety ana Health Act of 1970 providing for standards
for the health and safety protection of employees engaged in hazard-
ous waste operations.
(g)	Grant Program.—
(1)	Grant purposes.—Grants for the training and education
of workers who are or may be engaged in activities related to
hazardous waste removal or containment or emergency re-
sponse may be made under this subsection.
(2)	Administration.—Grants under this subsection shall be
administered by the National Institute of Environmental
Health Sciences.
(3)	Grant recipients.—Grants shall be awarded to nonprofit
organizations which demonstrate experience in implementing
and operating worker health and safety training and education
programs and demonstrate the ability to reach and. involve in
training programs target populations of workers who are or will
be engaged in hazardous waste removal or containment or
emergency response operations.
SEC 127. LIABILITY LIMITS FOR OCEAN INCINERATION VESSELS.
(a)	Definition of Incineration Vessel.—Section 101 of CERCLA
is amended by adding the following after paragraph (37):
"(38) The term 'incineration vessel' means any vessel which
carries hazardous substances for the purpose of incineration of
such substances, so long as such substances or residues of such
substances are on board.". 	
(b)	Liability.—Section 107 of CERCLA is amended as follows:
(1)	Subsection (aX3) is amended by inserting "or incineration
vessel" after "facility".
(2)	Subsection (aX4) is amended by inserting incineration
vessels" after "facilities".
(3)	Subparagraph (A) of subsection (cXl) is amended by insert-
ing other than an incineration vessel," after "vessel".
(4)	Subparagraph (5) of subsection (cXl) is amended by insert-
ing "other than an incineration vessel," after "other vessel,".
(5)	Subparagraph (D) of subsection (cXl) is amended by insert-
ing "any incineration vessel or" before "any facility".
(c)	Financial Responsibility.—Section 108(a) of CERCLA is
amended as follows:
(1)	Paragraph (1) is amended by inserting "to cover the liabil-
ity prescribed under paragraph (1) of section 107(a) of this Act"
after "whichever is greater)";
(2)	Add a new paragraph to read as follows:
"(4) In addition to the financial responsibility provisions of
paragraph (1) of this subsection, the President shall require

-------
H.R.2005—81
additional evidence of financial responsibility for incineration
vessels in such amounts, and to cover such liabilities recognized
by law, as the President deems appropriate, taking into account
the potential risks posed by incineration and transport for
incineration, and any other factors deemed relevant".
(d)	Savings Clause.—Section 106 of the Marine Protection,
Research, and Sanctuaries Act of 1972 is amended by adding the
following new subsection at the end thereof:
"(g) Savings Clause.—Nothing in this Act shall restrict, affect or
modify the rights of any person (1) to seek damages or enforcement
of any standard or limitation under State law, including State
common law, or (2) to seek damages under other Federal law,
including maritime tort law, resulting from noncompliance with any
requirement of this Act or any permit under this Act.".
(e)	Maritime Tost.—Section 107(h) of CERCLA is amended by
inserting under maritime tort law," after "with this section" and
by inserting before the period "or the absence of any physical
damage to the proprietary interest of the claimant".
TITLE D—MISCELLANEOUS PROVISIONS
SEC. 201. POST-CLOSURE LIABILITY PROGRAM STUDY. REPORT TO CON-
GRESS. AND SUSPENSION OF LIABILITY TRANSFERS.
Subsection (k) of section 107 of CERCLA is amended by adding at
the end the following new paragraphs:
"(5) Suspension of liability transfer.—Notwithstanding
paragraphs (1), (2), (3), and (4) of this subsection and subsection
(j) of section 111 of this Act, no liability shall be transferred to
or assumed by the Post-Closure Liability Trust Fund established
by section 232 of this Act prior to completion of the study
required under paragraph (6) of this subsection, transmission of
a report of such study to both Houses of Congress, and
authorization of such a transfer or assumption by Act of Con-
gress following receipt of such study and report
"(6) Study of options for post-closure program.—
"(A) Study.—The Comptroller General shall conduct a
study of options for a program for the management of the
liabilities associated with hazardous waste treatment, stor-
age, and disposal sites after their closure which com-
plements the policies set forth in the Hazardous and Solid
Waste Amendments of 1984 and assures the protection of
human health and the environment
"(B) Program elements.—The program referred to in
subparagraph (A) shall be designed to assure each of the
following:
"(i) Incentives are created and maintained for the
safe management and disposal of hazardous wastes so
as to assure protection of human health and the
environment
"(ii) Members of the public will have reasonable
confidence that hazardous wastes will be managed and
disposed of safely and that resources will be available
to address any problems that may arise and to cover
costs of long-term monitoring, care, and maintenance
of such sites.

-------
H. R. 2005—82
"(iii) Persons who are or seek to become owners and
operators of hazardous waste disposal facilities will be
able to manage their potential future liabilities and to
attract the investment capital necessary to build, oper-
ate, and close such facilities in a manner which assures
protection of human health and the environment.
"(C) Assessments.—The study under this paragraph shall
include assessments of treatment, storage, and disposal
facilities which have been or are likely to be issued a permit
under section 3005 of the Solid Waste Disposal Act and the
likelihood of future insolvency on the part of owners and
operators of such facilities. Separate assessments shall be
made for different classes of facilities and for different
classes of land disposal facilities and shall include but not
be limited to—
"(i) the current and future financial capabilities of
facility owners and operators;
"(ii) the current and future costs associated with
facilities, including the costs of routine monitoring and
maintenance, compliance monitoring, corrective action,
natural resource damages, and liability for damages to
third parties; and
"(iii) the availability of mechanisms by which owners
and operators of such facilities can assure that current
and future costs, including post-closure costs, will be
financed.
"(D) Procedures.—In carrying out the responsibilities of
this paragraph, the Comptroller General shall consult with
the Administrator, the Secretary of Commerce, the Sec-
retary of the Treasury, and the heads of other appropriate
Federal agencies.
"(E) Consideration of options.—In conducting the study
under this paragraph, the Comptroller General shall con-
sider various mechanisms and combinations of mechanisms
to complement the policies set forth in the Hazardous and
Solid Waste Amendments of 1984 to serve the purposes set
forth in subparagraph (B) and to assure that the current
and future costs associated with hazardous waste facilities,
inrlnriiTig' post-closure costs, will be adequately financed
and, to the greatest extent possible, borne by the owners
and operators of such facilities. Mechanisms to be consid-
ered include, but are not limited to—
"(i) revisions to closure, post-closure, and financial
responsibility requirements under subtitles C and I of
the Solid Waste Disposal Act;
"(ii) voluntary risk pooling by owners and operators;
"(iii) legislation to require risk pooling by owners and
operators;
"(iv) modification of the Post-Closure Liability Trust
Fund previously established by section 232 of this Act,
and the conditions for transfer of liability under this
subsection, including limiting the transfer of some or
all liability under this subsection only in the case of
insolvency of owners and operators;
"(v) private insurance;
"(vi) insurance provided by the Federal Government;

-------
H.R.2005—88
"(vii) coinsurance, reinsurance, or pooled-risk insur-
ance, whether provided by the private sector or pro-
vided or assisted by the Federal Government; and
"(viii) creation of a new program to be administered
by a new or existing Federal agency or by a federally
chartered corporation.
"(F) Recommendations.—The Comptroller General shall
consider options for funding any program under this section
and shall, to the extent necessary, make recommendations
to the appropriate committees of Congress for additional
authority to implement such program.".
SEC 202. HAZARDOUS MATERIALS TRANSPORTATION.
(a)	Regulation Requirement.—Section 306(a) of CERCLA is
amended (1) by striking out "within ninety days after the date of
enactment of this Act" and inserting in lieu thereof "within 30 days
after the enactment of the Superfund Amendments and Reauthor-
ization Act of 1986" and (2) by inserting "and regulated" before "as
a hazardous material".		
(b)	Conforming Amendment.—Section 306(b) of CERCLA is
amended by inserting "and regulation" after "prior to the effective
date of the listing".
SEC 203. STATE PROCEDURAL REFORM.
(a) In General —Title in of CERCLA is amended by adding the
following new section at the end thereof:
"SEC 309. ACTIONS UNDER STATS LAW FOR DAMAGES FROM EXPOSURE
TO HAZARDOUS SUBSTANCES.
"(a) State Statutes of Limitations for Hazardous Substance
Cases.—
"(1) Exception to state statutes.—In the case of any action
brought under State law for personal injury, or property dam-
ages, which are caused or contributed to by exposure to any
hazardous substance, or pollutant or contaminant, released into
the environment from a facility, if the applicable limitations
period for such action (as specified in the State statute of
limitations or under common law) provides a commencement
date which is earlier than the federally required commence-
ment date, such period shall commence at the federally re-
quired commencement date in lieu of the date specified in such
State statute.
"(2) State law generally applicable.—Except as provided
in paragraph (1), the statute of limitations established under
State law shall apply in all actions brought under State law for
personal injury, or property damages, which are caused or
contributed to by exposure to any hazardous substance, or
pollutant or contaminant, released into the environment from a
facility.
"(3) Actions under section 107.—Nothing in this section
shall apply with respect to any cause of action brought under
section 107 of this Act.
"(b) Definitions.—As used in this section—
"(1) Title i terms.—The terms used in this section shall have
the same meaning as when used in title I of this Act.
"(2) Applicable limitations period.—The term 'applicable
limitations period' means the period specified in a statute of

-------
R R. 2005—84
limitations during which a civil action referred to in subsection
(aXl) may be brought
"(3) Commencement date.—The term 'commencement date'
means the date specified in a statute of limitations as the
beginning of the applicable limitations period.
(4) Federally required commencement date.—
"(A) In general.—Except as provided in subparagraph
(6), the term 'federally required commencement date'
means the date the plaintiff knew (or reasonably should
have known) that the personal injury or property damages
referred to in subsection (aXl) were caused or contributed to
by the hazardous substance or pollutant or contaminant
concerned.
"(B) Special rules.—In the case of a minor or incom-
petent plaintiff, the term 'federally required commence-
ment date' means the later of the date referred to in
subparagraph (A) or the following:
"(i) In the case of a minor, the date on which the
minor reaches the age of majority, as determined by
State law, or has a legal representative appointed.
"(ii) In the case of an incompetent individual, the
date on which such individual becomes competent or
has had a legal representative appointed.".
(b) Effective Date.—The amendment made by subsection (a) of
this section shall take effect with respect to actions brought after
December 11,1980.
SEC 204. CONFORMING AMENDMENT TO FUNDING PROVISIONS.
(a)	Hazardous Substances Superfund.—Section 221(a) of
CERCLA is amended by striking out "Hazardous Substance Re-
sponse Trust Fund" and inserting in lieu thereof "Hazardous Sub-
stances Superfund".
(b)	Cross Reference to Funding Provisions.—Section 221(c) of
CERCLA is amended to read as follows:
"(c) Expenditures From Trust Fund.—Amounts in the Hazard-
ous Substances Superfund established under subchapter A of chap-
ter 98 of the Internal Revenue Code of 1954 shall be available for
expenditure only as provided in section 111 of this Act".
SEC 20 S. CLEANUP OF PETROLEUM FROM LEAKING UNDERGROUND STOR-
AGE TANKS.
(a)	Definition of Petroleum.—Section 900M2XB) of the Solid
Waste Disposal Act is amended by striking out all that follows
"petroleum" and inserting in lieu thereof a period. Section 9001 of
such Act is amended by adding at the end thereof the following:
"(8) The term 'petroleum means petroleum, including crude
oil or any fraction thereof which is liquid at standard conditions
of temperature and pressure (60 degrees Fahrenheit and 14.7
pounds per square inch absolute).".
(b)	State Inventories.—Section 9002 of the Solid Waste Disposal
Act is amended by adding the following new subsection at the end
thereof:
"(c) State Inventories.—Each State shall make 2 separate inven-
tories of all underground storage tanks in such State containing
regulated substances. One inventory shall be made with respect to
petroleum and one with respect to other regulated substances. In
making such inventories, the State shall utilize and aggregate the

-------
H.R.2005—85
data in the notification forms submitted pursuant to subsections (a)
and (b) of this section. Each State shall submit such aggregated data
to the Administrator not later than 270 dayB after the enactment of
the Superfund Amendments and Reauthorization Act of 1986."
(c) Financial Responsibility.—
(1)	Requirements.—Section 9003(c) of the Solid Waste Dis-
posal Act is amended by striking "and" at the end of paragraph
(4), striking the period at the end of paragraph (5) and substitut-
ing and and by adding the following new paragraph at the
end thereof:
"(6) requirements for maintaining evidence of finnnHnl
responsibility for taking corrective action and compensating
third parties for bodily injury and property damage caused by
sudden and nonsudden accidental releases arising from operat-
ing an underground storage tank.".
(2)	Conforming amendment.—Section 9003(d) of such Act is
amended by striking out paragraph (1) and renumbering
paragraphs (2) through (5) as paragraphs (1) through (4),
respectively.
(3)	Other methods.—Section 9003(dXl) of such Act (as
redesignated by paragraph (2) of this subsection) is amended by
striking out "or after "credit," and by striking out the period
at the end thereof and inserting in lieu thereof the following:
"or any other method satisfactory to the Administrator.".
(4)	Section 9003(d) of such Act is further amended by adding
at the end thereof the following new paragraph:
"(5XA) The Administrator, in promulgating financial respon-
sibility regulations under this section, may establish an amount
of coverage for particular	or categories of underground
storage tanks containing petroleum whic± shall satisfy such
regulations and which shall not be less than $1,000*000 for each
occurrence with an appropriate aggregate requirement.
"(B) The Administrator may set amounts lower than the
amounts required by subparagraph (A) of this paragraph for
underground storage tanks containing petroleum which are at
facilities not engaged in petroleum production, refining, or
marketing and which are not used to	substantial quan-
tities of petroleum.
"(C) In establishing classes and categories for purposes of this
paragraph, the Administrator may consider the following
factors:
"(i) The size, type, location, storage, and handling capac-
ity of underground storage tanks in the class or category
and the volume of petroleum handled by such tanks.
"(ii) The likelihood of release and the potential extent of
damage from any release from underground storage tanks
in the class or category.
"(iii) The economic impact of the limits on the owners and
operators of each such class or category, particularly relat-
ing to the small business segment of the petroleum
marketing industry.
"(iv) The availability of methods of financial responsibil-
ity in amounts greater than the amount established by this
paragraph.
"(v) Such other factors as the Administrator deems
pertinent.

-------
H.R.2005—86
"(D) The Administrator may suspend enforcement of the
.financial responsibility requirements for a particular class or
category of underground storage tanks or in a particular State,
if the Administrator makes a determination that methods of
financial responsibility satisfying the requirements of this
subsection are not generally available for underground storage
tanks in that class or category, and—
"(i) steps are being taken to form a risk retention group
for such class of tanks; or
"(ii) such State is taking steps to establish a fund pursu-
ant to section 9004(cXl) of this Act to be submitted as
evidence of financial responsibility.
A suspension by the Administrator pursuant to this paragraph
shall extend for a period not to exceed 180 days. A determina-
tion to suspend may be made with respect to the same class or
category or for the same State at the end of such period, but
only if substantial progress has been made in establishing a risk
retention group, or the owners or operators in the class or
category demonstrate, and the Administrator finds, that the
formation of such a group is not possible and that the State is
unable or unwilling to establish such a fond pursuant to clause
(ii).".
(d) EPA Response Phogeam. —Section 9003 of the Solid Waste
Disposal Act is amended by adding after subsection (g) the following
new subsection:
"(h) EPA Response Program for Petroleum.—
"(1) Before regulations.—Before the effective date of regula-
tions under subsection (c), the Administrator (or a State pursu-
ant to paragraph (7)) is authorized to—:
"(A) require the owner or operator of an underground
storage tank to undertake corrective action with respect to
any release of petroleum when the Administrator (or the
State) determines that such corrective action will be done
properly and promptly by the owner or operator of the
underground storage tank from which the release occurs; or
"(B) undertake corrective action with respect to any re-
lease of petroleum into the environment from an under-
ground storage tank if such action is necessary, in the
judgment of the Administrator (or the State), to protect
human hgqlth and the environment.
The corrective action undertaken or required under this para-
graph shall be such as may be necessary to protect human
health and the environment. The Administrator shall use funds
in the Tanking Underground Storage Tank Trust Fund for
payment of costs incurred for corrective action under subpara-
graph (B), enforcement action under subparagraph (A), ana cost
recovery under paragraph (6) of this subsection. Subject to the
priority requirements of paragraph (3), the Administrator (or
the State) ahull give priority in undertaking such actions under
subparagraph (B) to cases where the Administrator (or the
State) cannot identify a solvent owner or operator of the tank
who will undertake action properly.
"(2) After regulations.—Following the effective date of
regulations under subsection (c), all actions or orders of the
Administrator (or a State pursuant to paragraph (7)) described
in paragraph (1) of this subsection shall be in conformity with
such regulations. Following such effective date, the Adminis-

-------
H.R.2005—87
trator (or the State) may undertake corrective action with
respect to any release of petroleum into the environment from
an underground storage tank only if such action is necessary, in
the judgment of the Administrator (or the State), to protect
human health and the environment and one or more of the
following situations exists:
"(A) No person can be found, within 90 days or such
shorter period as may be necessary to protect human health
and the environment, who is—
"(i) an owner or operator of the tank concerned,
"(ii) subject to such corrective action regulations, and
"(iii) capable of carrying out such corrective action'
properly.
"(B) A situation exists which requires prompt action by
the Administrator (or the State) under this paragraph to
protect human health and the environment
"(C) Corrective action costs at a facility exceed the
amount of coverage required by the Administrator pursu-
ant to the provisions of subsections (c) and (dX5) of this
section and, considering the class or category of under-
ground storage tank from which the release occurred,
expenditures from the Tanking Underground Storage Tank
Trust Fund are necessary to assure an effective corrective
action*
"(D) The owner or operator of the tank has Sailed or
refused to comply with an order of the Administrator under
this subsection or section 9006 or with the order of a State
under this subsection to comply with the corrective action
regulations.
"(3) Priority op corrective actions.—The Administrator (or
a State pursuant to paragraph (7)) shall give priority in under-
taking corrective actions under this subsection, and in issuing
orders requiring owners or operators to undertake such actions,
to releases of petroleum from underground storage tanks which
pose the greatest threat to human health and the environment.
"(4) Corrective action orders.—The Administrator is au-
thorized to issue orders to the owner or operator of an under-
ground storage tank to carry out subparagraph (A) .of paragraph
(1) or to carry out regulations issued under subsection (cX4). A
State acting pursuant to paragraph (7) of this subsection is
authorized to carry out subparagraph (A) of paragraph (1) only
until the State's program is approved by the Administrator
under section 9004 of this subtitle. Such orders shall be issued
and enforced in the same manner and subject to the same
requirements as orders under section 9006.
(5) Allowable corrective actions.—The corrective actions
undertaken by the Administrator (or a State pursuant to para-
graph (7)) unaer paragraph (1) or (2) may include temporary or
permanent relocation of residents and alternative household
water supplies. In connection with the performance of any
corrective action under paragraph (1) or (2), the Administrator
may undertake an exposure assessment as defined in paragraph
(10) of this subsection or provide for such an assessment in a
cooperative agreement with a State pursuant to paragraph (7) of
this subsection. The costs of any such assessment may be
treated as corrective action for purposes of paragraph (6), relat-
ing to cost recovery.

-------
H. R. 2006—88
"(6) Recovery of costs.—
"(A) In qenxkal.—Whenever costs have been incurred by
the Administrator, or by a State pursuant to paragraph (7),
for undertaking corrective action or enforcement action
with respect to the release of petroleum from an under-
ground storage tank, the owner or operator of such tank
shall be liable to the Administrator or the State for such
costs. The liability under this paragraph shall be construed
to be the standard of liability which obtains under section
311 of the Federal Water Pollution Control Act.
"(6) Recovery.—In determining the equities for seeking
the recovery of costs under subparagraph (A), the Adminis-
trator (or a State pursuant to paragraph (7) of this subsec-
tion) may consider the amount of financial responsibility
required to be maintained under subsections (c) and (dX5) of
this section and the factors considered in establishing such
amount under subsection (dX5).
"(O Effect on liability.—
"(i) No transfers of liability.—No indemnification,
hold harmless, or similar agreement or conveyance
shall be effective to transfer from the owner or opera-
tor of any underground storage tank or from any
person who may be liable for a release or threat of
release under this subsection, to any other person the
liability imposed under this subsection. Nothing in this
subsection shall bar any agreement to insure, hold
harmless, or indemnify a party to such agreement for
any liability under this section.
"(ii) No bar to cause of action.—Nothing is this
subsection, including the provisions of clause (i) of this
subparagraph, shall bar a cause of action that an owner
or operator or any other person subject to liability
under this section, or a guarantor, has or would have,
by reason of subrogation or otherwise against any
person.
"(D) Facility.—For purposes of this paragraph, the term
'facility' means, with respect to any owner or operator, all
underground storage tanks used for the storage of petro-
leum which are owned or operated by such owner or opera-
tor and located on a single parcel of property (or on any
contiguous or adjacent property).
"(7) State authorities.—
"(A) General.—A State may exercise the authorities in
paragraphs (1) and (2) of this subsection, subject to the
terms and conditions of paragraphs (3), (5), (9), (10), and (11),
and including the authorities of paragraphs (4), (6), and (8)
of this subsection if—
"(i) the Administrator determines that the State has
the capabilities to carry out effective corrective actions
and enforcement activities; and
"(ii) the Administrator enters into a cooperative
agreement with the State setting out the actions to be
undertaken by the State.
The Administrator may provide funds from the Leaking
Underground Storage Tank Trust Fund for the reasonable
costs of the State's actions under the cooperative
agreement

-------
H. R. 2005—89
"(B) Cost share.—Following the effective date of the
regulations under subsection (c) of this section, the State
shall pay 10 per centum of the cost of corrective actions
undertaken either by the Administrator or by the State
under a cooperative agreement, except that the Adminis-
trator may take corrective action at a facility where imme-
diate action is necessary to respond to an imminent and
substantial endangerment to human health or the environ-
ment if the State fails to pay the cost share.
"(8) Emergency procurement powers.—Notwithstanding
any other provision of law, the Administrator may authorize
the use of such emergency procurement powers as he deems
necessary.
"(9) Definition of owner.—As used in this subsection, the
term 'owner' does not include any person who, without partici-
pating in the management of an underground storage tank and
otherwise not engaged in petroleum production, refining, and
marketing, holds indicia of ownership primarily to protect the
owner's security interest in the tank.
"(10) Definition of exposure assessment.—As used in this
subsection, the term 'exposure assessment' means an assess-
ment to determine the extent of exposure of, or potential for
exposure of, individuals to petroleum from a release from an
underground storage tank based on such factors as the nature
and extent of contamination and the existence of or potential
for pathways of human exposure (including ground or surface
water contamination, air emissions, and food chain contamina-
tion), the size of the community within the likely pathways of
exposure, and the comparison of expected human exposure
levels to the short-term and long-term health effects associated
with identified contaminants and any available recommended
exposure or tolerance limits for such contaminants. Such assess-
ment shall not delay corrective action to abate immediate haz-
ards or reduce exposure.
"(11) Facilities without financial responsibility.—At any
facility where the owner or operator has failed to maintain
evidence of financial responsibility in amounts at least equal to
the amounts established oy subsection (dXoXA) of this section (or
a lesser amount if such amount is applicable to such facility as a
result of subsection (dX5XB) of this section) for whatever reason
the Administrator shall expend no monies from the T-pairing
Underground Storage Tank Trust Fund to clean up releases at
such facility pursuant to the provisions of paragraph (1) or (2) of
this subsection. At such facilities the Administrator shall use
the authorities provided in subparagraph (A) of paragraph (1)
and paragraph (4) of this subsection and section 9006 oif this
subtitle to order corrective action to clean up such releases.
States acting pursuant to paragraph (7) of this subsection shall
use the authorities provided in subparagraph (A) of paragraph
(1) and paragraph (4) of this subsection to order corrective
action to clean up such releases. Notwithstanding the provisions
of this paragraph, the Administrator may use monies from the
fund to take the corrective actions authorized by paragraph (5)
of this subsection to protect human health at such facilities and
shall seek full recovery of the costs of all such actions pursuant
to the provisions of paragraph (6XA) of this subsection and
without consideration of the factors in paragraph (6XB) of this

-------
H. R. 2005—90
subsection. Nothing in this paragraph shall prevent the
Administrator (or a State pursuant to paragraph (7) of this
subsection) from taking corrective action at a facility where
there is no solvent owner or operator or where immediate action
is necessary to respond to an imminent and substantial
endangerment of human health or the environment.".
(e)	Financial Responsibility in State Programs.—
(1)	Section 9004(cXl) of the Solid Waste Disposal Act is
amended by striking out "financed by fees on tank owners and
operators and".
(2)	Section 9004(cX2) of the Solid Waste Disposal Act is
amended by striking out "or" after "credit," in the first sen-
tence and by striking out the period at. the end thereof and
inserting in lieu thereof the following: "or any other method
satisfactory to the Administrator.". Such section is further
amended by adding after the word "terms" in the second sen-
tence the following; "including the amount of coverage required
for various classes and categories of underground storage tanks
pursuant to section 9003(dX5)".
(f)	Authority to Enter for Corrective Actions.—
(1)	Section 9005(a) of the Solid Waste Disposal Act is amended
by inserting the words "taking any corrective action" after the
word "study", inserting the words "acting pursuant to subsec-
tion (hX7) of section 9003 or" after the words "or representative
of a State", striking the word "and" before the words "permit
such officer", and inserting the words "and permit such officer
to have access for corrective action" after the words "relating to
such tanks" in the first sentence thereof. Such section is further
amended by inserting the words "taking corrective action,"
after the word "study,' in the second sentence thereof.
(2)	Section 9005(a) of the Solid Waste Disposal Act is amended
by striking the word "and" at the end of paragraph (2), striking
out the period at the end of paragraph (3) and inserting and',
and adding the following new paragraph at the end thereof—
"(4) to take corrective action.'.
(3)	Section 9005 of the Solid Waste Disposal Act is amended by
changing the heading thereof to read as follows—
"inspections, monitoring, testing and corrective action".
(g)	Coordination With Other Laws.—Section 9008 of the Solid
Waste Disposal Act is amended to read as follows:
"state authority
"Sec. 9008. Nothing in this subtitle shall preclude or deny any
right of any State or political subdivision thereof to adopt or enforce
any regulation, requirement, or standard of performance respecting
underground storage tanks that is more stringent than a regulation,
requirement, or standard of performance in effect under this sub-
title or to impose any additional liability with respect to the release
of regulated substances within such State or political subdivision."
(h)	Pollution Liability Insurance.—
(1) Study.—The Comptroller General shall conduct a study of
the availability of pollution liability insurance, leak insurance,
and contamination insurance for owners and operators of petro-
leum storage and distribution facilities. The study shall assess

-------
H. R. 2005—91
the current and projected extent to which private insurance can
contribute to the fiT"'nHn1 responsibility of owners and opera-
tors of underground storage tanks and the ability of owners and
operators of underground storage tanks to maintain financial
responsibility through other methods. The study shall consider
the experience of owners" and operators of marine vessels in
getting insurance for their liabilities under the Federal Water
Pollution Control Act and the operation of the Water Quality
Insurance Syndicate.
(2) Report.—The Comptroller General shall report the find-
ings under this subsection to the Congress within 15 'months
after the enactment of this subsection. Such report shall include
recommendations for legislative or administrative changes that
will enable owners and operators of underground storage tanks
to Tnaintflin financial responsibility sufficient to provide all
clean-up costs and damages that may result from reasonably
foreseeable releases and events.
(i) Criminal Penalties Relating to Used Oil.—Subtitle C of the
Solid Waste Disposal Act is amended as follows:
(1)	In paragraphs (4) and (5) of section 3008(d) after "hazard-
ous waste" insert "or any used oil not identified or listed as a
hazardous waste under this subtitle".
(2)	Delete "accompanied by a manifest;; or" in paragraph (5)
and insert "accompanied by a manifest;".
(3)	Insert or" after.paragraph (6).
(4)	Add the following new. paragraph after paragraph (6):
"(7) knowingly stores, treats, transports, or causes to be trans-
ported, disposes of, or otherwise handles any used oil not identi-
fied or listed as a hazardous waste under subtitle C of the Solid.
Waste Disposal Act—
"(A) in knowing violation of any material condition or
requirement of a permit under this subtitle C; or
"(B) in knowing violation of any material condition or
requirement of any applicable regulations or standards
under this Act;".
(5)	In section 3008(e):
(A)	Insert "or used oil not identified or listed as a hazard-
ous waste under this subtitle" immediately after "this
subtitle".
(B)	Strike "or" immediately before "(6)".
(© Insert or (7)" immediately after "(6)".
(j) State Pbograms toe Used Oil.—Section 3006 of the Solid
Waste Disposal Act is amended by adding the following new subsec-
tion at the end thereof:
"(h) State Programs for Used Oil.—In the case of used oil which
is not listed or identified under this subtitle as a hazardous waste
but which is regulated under section 3014, the provisions of this
section regarding State programs shall apply in the same manner
and to the same extent as such provisions apply to hazardous waste
identified or listed under this subtitle.".
SEC 206. CITIZENS SUITS.
Title HI of CERCLA is amended by adding the following new
section after section 309:

-------
H.R.2005—92
"SEC 310. CITIZENS SUITS.
"(a) Authority to Being Civil Actions.—Except as provided in
subsections (d) and (e) of this section and in section 113(h) (relating
to timing of judicial review), any person may commence a civil
action on his own behalf—
"(1) against any person {including the United States and any
other governmental instrumentality or agency, to the extent
permitted by the eleventh amendment to the Constitution) who
is alleged to be in violation of any standard, regulation, condi-
tion, requirement, or order which has become effective pursuant
to this Act (including any provision of an agreement under
section 120, relating to Federal facilities); or
"(2) against the President or any other officer of the United
States (including the Administrator of the Environmental
Protection Agency and the Administrator of the ATSDR) where
there is alleged a failure of the President or of such other officer
to perform any act or duty under this Act, including an act or
duty under section 120 (relating to Federal facilities), which is
not discretionary with the President or such other officer.
Paragraph (2) shall not apply to any act or duty under the provisions
of section 311 (relating to research, development, and
demonstration).
"(b) Venus.—
"(1) Actions under subsection taxi).—Any action under
subsection (aXl) shall be brought in the district court for the
district in which the alleged violation occurred.
"(2) Actions under subsection (am—Any action brought
under subsection (aX2) may be brought in the United States
District Court for the District of Columbia.
"(c) Relief.—The district court shall have jurisdiction in actions
brought under subsection (aXl) to enforce the standard, regulation,
condition, requirement, or order concerned (including any provision
of an agreement under section 120), to order such action as may be
necessary to correct the violation, and to impose any civil penalty
provided for the violation. The district court shall have jurisdiction
in actions brought under subsection (a)(2) to order the President or
other officer to perform the act or duty concerned.
"(d) Rules Applicable to Subsection (aXl) Actions.—
"(1) Notice.—No action may be commenced under subsection
(aXl) of this section before SO days after the plaintiff has given
notice of the violation to each of the following:
"(A) The President.
"(B) The State in which the alleged violation occurs.
"(C) Any alleged violator of the standard, regulation,
condition, requirement, or order concerned (including any
provision of an agreement under section 120).
Notice under this paragraph shall be given in such manner as
the President shall prescribe by regulation.
"(2) Diligent prosecution.—No action may be commenced
under paragraph (1) of subsection (a) if the President has com-
menced and is diligently prosecuting an action under this Act,
or under the Solid Waste Disposal Act to require compliance
with the standard, regulation, condition, requirement, or order
concerned (including any provision of an agreement under sec-
tion 120).

-------
H.R.2005—93
"(e) Rules Applicable to Subsection (aX2) Actions.—No action
may be commenced under paragraph (2) of subsection (a) before the
60th day following the date on which the plaintiff gives notice to the
Administrator or other department, agency, or instrumentality that
the plaintiff will commence such action. Notice under this subsec-
tion shall be given in such manner as the President shall prescribe
by regulation.
"(f) Costs.—The court, in issuing any final order in any action
brought pursuant to this section, may award costs of litigation
(including reasonable attorney and expert witness fees) to the
prevailing or the substantially prevailing party whenever the court
determines such an award is appropriate. The court may, if a
temporary restraining order or preliminary injunction is sought,
require the filing of a bond or equivalent security in accordance with
the Federal Rules of Civil Procedure.
"(g) Intervention.—In any action under this section, the United
States or the State, or both, if not a party may intervene as a matter
of right. For other provisions regarding intervention, see section 113.
"(h) Other Rights.—This Act does not affect or otherwise impair
the rights of any person under Federal, State, or common law,
except with respect to the timing of review as provided in section
113(h) or as otherwise provided in section 309 (relating to actions
under State law).
"(i) Definitions.—The terms used in this section shall have the
same meanings as when used in title L".
SEC 207. INDIAN TRIBES.
(a)	Definition.—For definition of indium tribe, see the amend-
ments made by section 101 of this Act
(b)	Future Maintenance and Cost Shaking.—Section 104(cX3) of
CERCLA is amended by adding at the end thereof the following; "In
the case of remedial action to be taken on land or water held by an
Indian tribe, held by the United States in trust for Trntinrm held by a
member of an Indian tribe (if such land or water is subject to a trust
restriction on alienation), or otherwise within the borders of an
Indian reservation, the requirements of this paragraph for assur-
ances regarding future maintenance and cost-sharing shall not
apply, and the President shall provide the assurance required by
this paragraph regarding the availability of a hazardous waste
disposal facility.".		
(c)	Liability.—Section 107 of CERCLA is amended as follows:
(1)	In subsection (a) by inserting "or an Indian' tribe" after
"State";
(2)	In subsection (f):
(A)	Insert after "State" the third time that word appears
the following: "and to any TtmK«« tribe for natural re-
sources belonging to, managed by, controlled by, or ap-
pertaining to such tribe, or held in trust for the benefit of
such tribe, or belonging to a member of such tribe if such
resources are subject to a trust restriction on alienation".
(B)	Insert "or Indian tribe" after "State" the fourth time
that word appears.
(O Add before the period at the end of the first sentence
the following: ", so long as, in the case of damages to an
Indian tribe occurring pursuant to a Federal permit or
license, the issuance of that permit or license was not

-------
a R. 2005—94
inconsistent with the fiduciary duty of the United States
with respect to such Indian tribe".
(D) Insert "or the Indian tribe" after "State government".
(3)	In subsection (i) insert "or Indian tribe" after "State" the
first time it appears.
(4)	In subsection (j) insert "or Indian tribe" after "State" the
first time it appears.
(d)	Natural Resources Claims, Delegation, Etc.—Section 111 of
CEKCLA is amended as follows:
(1)	In subsection (b), insert before the period at the end
thereof the following; or by any Indian tribe or by the United
States acting on behalf of any Indian tribe for natural resources
belonging to, managed by, controlled by, or appertaining to such
tribe, or held in trust for the benefit of such tribe, or belonging
to a member of such tribe if such resources are subject to a trust
restriction on alienation";
(2)	In subsection (cX2) insert "or Indian tribe" after "State".
(3)	In subsection (f) insert "or Indian tribe" after "State"; and
(4)	In subsection (i) insert after "State," the following; "and by
the governing body of any Indian tribe having sustained
damage to natural resources belonging to, managed by, con-
trolled by, or appertaining to such tribe, or held in trust for the
benefit of such tribe, or belonging to a member of such tribe if
such resources are subject to a trust restriction on alienation,".
(e)	Treatment of Tribes Generally.—Title I of CERCLA is
amended by adding the following new section after section 125:
"SEC. 126. INDIAN TRIBES.
"(a) Treatment Generally.—The governing body of an Indian
tribe shall be afforded substantially the same treatment as a State
with respect to the provisions of section 103(a) (regarding notifica-
tion of releases), section 104(cX2) (regarding consultation on re-
medial actions), section 104(e) (regarding access to information),
section 104(i) (regarding health authorities) and section 105 (regard-
ing roles and responsibilities under the national contingency plan
and submittal of priorities for remedial action, but not including the
provision regarding the inclusion of at least one facility per State on
the National Priorities List).
"(b) Community Relocation.—Should the President determine
that proper remedial action is the permanent relocation of tribal
members away from a contaminated site because it is cost effective
and necessary to protect their health and welfare, such finding must
be concurred in by the affected tribal government before relocation
shall occur. The President, in cooperation with the Secretary of the
Interior, shall also assure that all benefits of the relocation program
are provided to the affected tribe and that alternative land of
equivalent value is available and satisfactory to the tribe. Any lands
acquired for relocation of tribal members shall be held in trust by
the United States for the benefit of the tribe.
"(c) Study.—The President shall conduct a survey, in consultation
with the Indian tribes, to determine the extent of hazardous waste
sites on Indian lands. Such survey shall be included within a report
which "hall make recommendations on the program needs of tribes
under this Act, with particular emphasis on how tribal participation
in the administration of such programs can be maximized. Such
report qhail be submitted to Congress along with the President's
budget request for fiscal year 1988.

-------
H.R.2005—95
"(d) Limitation'.—Notwithstanding any other provision of this
Act, no action under this Act by an Indian tribe shall be barred until
the later of the following:
"(1) The applicable period of limitations has expired.
"(2) 2 years after the United States, in its capacity as trustee
for the tribe, gives written notice to the governing body of the
tribe that it mil not present a claim or commence an action on
behalf of the tribe or fails to present a claim or commence an
action within the time limitations specified in this Act."
SEC 208. INSURABILITY STUDY.
Section 301 of CERCLA is amended by adding the following new
subsection at the end thereof:
"(g) Insurability Study.-—
"(1) Study by comptroller general.—'The Comptroller Gen-
eral of the United States, in consultation with the persons
described in paragraph (2), shall undertake a study to determine
the insurability, and effects on the standard of care, of the
liability of each of the following;
(A) Persons who generate hazardous substances: liability
for costs and damages under this Act
"(B) Persons who own or operate facilities: liability for
costs and damages under this Act.
"(C) Persons liable for. injury to persons or property
caused by the release of hazardous substances into the
environment.
"(2) Consultation.—In conducting the study under this'
subsection, the Comptroller General shall consult with the
following:
"(A) Representatives of the Administrator.
"(B) Representatives of persons described ift subpara-
graphs (A) through (C) of the preceding paragraph.
"(C) Representatives (i) of groups or organizations com-
prised generally of persons adversely affected by releases or
threatened releases of hazardous substances and (ii) of
groups organized for protecting the interests of consumers.
"(D) Representatives of property and casualty insurers.
"(E) Representatives of reinsurers.
"(F) Persons responsible for the regulation of insurance
at the State level.
"(3) Items evaluated.—The study under this Bection shall
include, among other matters, an evaluation of the following:
"(A) Current economic conditions in, and the future
outlook for, the commercial market for insurance and
reinsurance.
"(B) Current trends in statutory and common law
remedies.
"(C) The impact of passible changes in traditional stand-
ards of liability, proof, evidence, and damages on gristing
statutory and common law remedies.
"(D) xhe effect of the standard of liability and extent of
the persons upon whom it is imposed under this Act on the
protection of human health and the environment and on
the availability, underwriting, and pricing of insurance
coverage.
"(E) Current trends, if any, in the judicial interpretation
and construction of applicable insurance contracts, together

-------
H. R. 2005—96
with the degree to which amendments in the language of
such contracts and the description of the risks assumed,
could affect such trends.
"(F) The frequency and severity of a representative
sample of rfwiwiw closed during the calendar year imme-
diately preceding the enactment of this subsection.
"(G) Impediments to the acquisition of insurance or other
means of obtaining liability coverage other than those re-
ferred to in the preceding subparagraphs.
"(H) The effects of the standards of liability and financial
responsibility requirements imposed pursuant to this Act
on the cost of, and incentives for, developing and dem-
onstrating alternative and innovative treatment tech-
nologies, as well as waste generation minimization.
"(4) Submission.—The Comptroller General shall submit a
report on the results of the study to Congress with appropriate
recommendations within 12 months after the enactment of this
subsection.".
SEC 209. RESEARCH. DEVELOPMENT. AND DEMONSTRATION.
(a)	Purpose.—The purposes of this section are as follows:
(1)	To establish a comprehensive and coordinated Federal
program of research, development, demonstration, and training
for the purpose of promoting the development of alternative and
innovative treatment technologies that can be used in response
actions under the CERCLA program, to provide incentives for
the development and use of such technologies, and to improve
the scientific capability to assess, detect and evaluate the effects
on and risks to human health from hazardous substances.
(2)	To establish a basic university research and education
program within the Department of Health and Human Services
and a research, demonstration, and training program within
the Environmental Protection Agency.
(3)	To reserve certain funds from the Hazardous Substance
Trust Fund to support a basic research program within the
Department of Health and Human Services, and an applied and
developmental research program within the Environmental
Protection Agency.
(4)	To enhance the Environmental Protection Agency's in-
ternal research capabilities related to CERCLA activities,
including site assessment and technology evaluation.
(5)	To provide incentives for the development of alternative
and innovative treatment technologies in a manner that supple-
ments or coordinates with, but does not compete with or dupli-
cate, private sector development of such technologies.
(b)	Amendment op CERCLA.—Title m of CERCLA is amended by
adding the following new section at the end thereof:
-SEC. 311. RESEARCH, DEVELOPMENT, AND DEMONSTRATION.
"(a) Hazardous Substance Research and Training.—
"(1) Authorities of secretary.—The Secretary of Health and
Human Services (hereinafter in this subsection referred to as
the Secretary), in consultation with the Administrator, shall
establish and support a basic research and training program
(through grants, cooperative agreements, and contracts) consist-
ing of the following:

-------
a R. 2005—97
"(A) Basic research (including epidemiologic and ecologic
studies) which may include each of the following:
"(i) Advanced techniques for the detection, assess-
ment, and evaluation of the effects on human health of
hazardous substances.
"(ii) Methods to assess the risks to human health
presented by hazardous substances.
"(iii) Methods and technologies to detect hazardous
substances in the environment and basic biological,
chemical, and physical methods to reduce the amount
and toxicity of hazardous substances.
'(B) Training, which may include each of the following;
"(i) Short courses and continuing education for State
and local health and environment agency personnel
and other personnel engaged in the handling of hazard-
ous substances, in the management of facilities at
which hazardous substances are located, and in the
evaluation of the hazards to human health presented
by such facilities.
"(ii) Graduate or advanced training in environmental
and occupational health and safety and in the public
health and engineering aspects of hazardous waste
control.
"(iii) Graduate training in the geosciences, including
hydrogeology, geological engineering, geophysics, geo-
chemistry, and related fields necessary to meet profes-
sional personnel needs in the public and private sectors
and to effectuate the purposes of this Act.
"(2) Director of niehs.—The Director of the National In-
stitute for Environmental Health Sciences shall cooperate fully
with.the relevant Federal agencies referred to in subparagraph
(A) of paragraph (5) in carrying out the purposes of this section.
"(3) Recipients of grants, etc.—A grant, cooperative agree-
ment, or contract may be made or entered into under paragraph
(1) with an accredited institution of higher education. The
institution may carry out the research or training under the
grant, cooperative agreement, or contract through contracts,
including contracts with any of the following;
"(A) Generators of hazardous wastes.
"(B) Persons involved in the detection, assessment,
evaluation, and treatment of hazardous substances.
"(C) Owners and operators of facilities at which hazard-
ous substances are located.
"(D) State and local governments.
"(4) Procedures.—In making grants and entering into co-
operative agreements and contracts under this subsection, the
Secretary shall act through the Director of the National In-
stitute for Environmental Health Sciences. In considering the
allocation of funds for training purposes, the Director shall
ensure that at least one grant, cooperative agreement, or con-
tract shall be awarded for training described in each of clauses
(i), (ii), and (iii) of paragraph (1XB). Where applicable, the Direc-
tor may choose to operate training activities in cooperation with
the Director of the National Institute for Occupational Safety
and Health. The procedures applicable to grants and contracts
under title TV of the Public Health Service Act shall be followed
under this subsection.

-------
H.R.2005—98
"(5) Advisory council.—To assist in the implementation of
this subsection and to aid in the coordination of research and
demonstration and training activities funded from the Fund
under this section, the Secretary shall appoint an advisory
council (hereinafter in this subsection referred to as the 'Ad-
visory Council') which shall consist of representatives of the
following;
"(A) The relevant Federal agencies.
"(B) The chemical industry.
"(C) The toxic waste management industry.
"(D) Institutions of higher education.
"(E) State and local health and environmental agencies.
"(F) The general public.
"(6) Planning.—Within nine months after the date of the
enactment of this subsection, the Secretary, acting through the
Director of the National Institute for Environmental Health
Sciences, shall issue a plan for the implementation of paragraph
(1). The plan shall include priorities for actions under para-
graph (1) and include research and training relevant to sci-
entific and technological issues resulting from site specific
hazardous substance response experience. The Secretary shall,
to the Tnarimnm extent practicable, take appropriate steps to
coordinate program activities under this plan with the activities
of other Federal agencies in order to avoid duplication of effort.
The plan shall be consistent with the need for the development
of new technologies for meeting the goals of response actions in
accordance with the provisions of this Act. The Advisory Coun-
cil shall be provided an opportunity to review and comment on
the plan and priorities and assist appropriate coordination
among the relevant Federal agencies referred to in subpara-
graph (A) of paragraph (5).
"(b) Alternative or Innovative Treatment Technology Re-
search and Demonstration Program.—
"(1) Establishment.—The Administrator is authorized and
directed to carry out a program of research, evaluation, testing,
development, and demonstration of alternative or innovative
treatment technologies (hereinafter in this subsection referred
to as the 'program') which may be utilized in response actions to
achieve more permanent protection of human health and wel-
fare and the environment.
"(2) Administration.—The program shall be administered by
the Administrator, acting through an office of technology dem-
onstration and shall be coordinated with programs carried out
by the Office of Solid Waste and Emergency Response and the
Office of Research and Development.
"(3) Contracts and grants.—In carrying out the program,
the Administrator is authorized to enter into contracts and
cooperative agreements with, and make grants to, persons,
public entities, and nonprofit private entities which are exempt
from tax under section 501(cX3) of the Internal Revenue Code of
1954. The Administrator shall, to the maximum extent possible,
enter into appropriate cost sharing arrangements under this
subsection.
"(4) Use op sites.—In carrying out the program, the Adminis-
trator may arrange for the use of sites at which a response may
be undertaken under section 104 for the purposes of carrying
out research, testing, evaluation, development, and demonstra-

-------
a E. 2005—99
tion projects. Each such proiect shall be carried out under such
terms and conditions as the Administrator shall require to
assure the protection of human health and the environment
and to assure adequate control bv the Administrator of the
research, testing, evaluation, development, and demonstration
activities at the site.
"(5) Demonstration assistance.—
"(A) Program components.—The demonstration assist-
ance program shall include the following:
"(i) The publication of a solicitation and the evalua-
tion of applications for demonstration projects utilizing
alternative or innovative technologies.
"(ii) The selection of sites which are suitable for the
testing and evaluation of innovative technologies.
"(iii) The development of detailed plans for innova-
tive technology demonstration projects.
"(iv) The supervision of such demonstration projects
and the providing of quality assurance for data
obtained.
"(v) The evaluation of the results of alternative
innovative technology demonstration projects and the
determination of whether or not the technologies used
are effective and feasible.
"(B) Solicitation. —Withir 90 days after the date of the
enactment of this section, and no less often than once every
12 months thereafter, the Administrator shall publish a
solicitation for innovative or alternative technologies at a
stage of development suitable for full-scale demonstrations
at sites at which a response action may be undertaken
under section 104. The purpose of any such project shall be
to demonstrate the use of an alternative or innovative
treatment technology with respect to hazardous substances
or pollutants or contaminants which are located at the site
or which are to be removed from the site. The solicitation
notice shall prescribe information to be included in the
application, including technical and economic data derived
from the applicant's own research and development efforts,
and other information sufficient to permit the Adminis-
trator to assess the technology's potential and the types of
remedial action to which it may be applicable.
"(C) Applications.—Any person and any public or pri-
vate nonprofit entity may submit an application to the
Administrator in response to the solicitation. The applica-
tion shall contain a proposed demonstration plan setting
forth how and when the project is to be carried out and
such other information as the Administrator may require.
"(D) Project selection.—In selecting technologies to be
demonstrated, the Administrator shall fully review the
applications submitted and shall consider at least the cri-
teria specified in paragraph (7). The Administrator shall
select or refuse to select a project for demonstration under
this subsection within 90 aays of receiving the completed
application for such project in the case of a refusal to select
the project, the Administrator shall notify the applicant
within such 90-day period of the reasons for his refusal.
"(E) Site selection.—The Administrator shall propose 10
sites at which a response may be undertaken under section

-------
H.R. 2005—100
104 to be the location of any demonstration project under
this subsection within 60 days after the close of the public
comment period. After an opportunity for notice and public
comment, the Administrator shall select such sites and
projects. In selecting any such site, the Administrator
take into account the applicant's technical data and pref-
erences either for onsite operation or for utilizing the site
as a source of hazardous substances or pollutants or
contaminants to be treated offsite.
"(F) Demonstration plan.—Within 60 days after the
selection of the site under this paragraph to be the location
of a demonstration project, the Administrator shall estab-
lish a final demonstration plan for the project, based upon
the demonstration plan contained in the application for the
project. Such plan shall clearly set forth how and when the
demonstration project will be carried out.
"(G) Supervision and testing.—Each demonstration
project under this subsection shall be performed by the
applicant, or by a person satisfactory to the applicant,
under the supervision of the Administrator. The Adminis-
trator shall enter into a written agreement with each ap-
plicant granting the Administrator the responsibility and
authority for testing procedures, quality control, monitor-
ing, and other measurements necessary to determine and
evaluate the results of the demonstration project. The
Administrator may pay the costs of testing, monitoring,
quality control, and other measurements required by the
Administrator to determine and evaluate the results of the
'	' 1 *' " "* '' sstablished by
ration project
under this subsection shall be completed within such time
as is established in the demonstration plan.
"(I) Extensions.—The Administrator may extend any
deadline established under this paragraph by mutual agree-
ment with the applicant concerned.
"(J) Funding restrictions.—The Administrator shall not
provide any Federal assistance for any part of a full-scale
field demonstration project under this subsection to any
applicant	such applicant can demonstrate that it
cannot obtain appropriate private financing on reasonable
terms and conditions sufficient to carry out such dem-
onstration project without such Federal assistance. The
total Federal funds for any full-scale field demonstration
project under thin subsection shall not exceed 50 percent of
the total cost of such project estimated at the time of the
award of such assistance. The Administrator shall not
expend more than $10,000,000 for assistance under the
program in any fiscal year and shall not expend more than
the Administrator shall initiate or cause to be initiated at least
10 field demonstration projects of alternative or innovative
treatment technologies at sites at which a response may be
undertaken under section 104, in fiscal year 1987 and each of
the succeeding three fiscal years. If the Administrator deter-
mines that 10 field demonstration projects under this subsection
$3,000,000 for any single project

-------
H.R. 2005—101
cannot be initiated consistent with the criteria set forth in
paragraph (7) in any of such fiscal years, the Administrator
shall transmit to the appropriate committees of Congress a
report explaining the reasons for his inability to conduct such
demonstration projects.
"(7) Criteria.—In selecting technologies to be demonstrated
under this subsection, the Administrator shall, consistent with
the protection of human health and the environment, consider
each of the following criteria:
"(A) The potential for contributing to solutions to those
waste problems which pose the greatest threat to human
health, which cannot be adequately controlled under
present technologies, or which otherwise pose significant
management difficulties.
"(B) The availability of technologies which have been
sufficiently developed for field demonstration and which
are likely to be cost-effective and reliable.
"(C) The availability and suitability of sites for dem-
onstrating such technologies, taking into account the phys-
ical, biological, chemical, and geological characteristics of
the sites, the extent and type of contamination found at the
site, and the capability to conduct demonstration projects in
such a manner as to assure the protection of human health
and the environment.
"(D) The likelihood that the data to be generated from
the demonstration project at the site will be applicable to
other sites.
"(8) Technology transfer.—In carrying out the program,
the Administrator shall conduct a technology transfer program
inrhidiTig the development, collection, evaluation, coordination,
and dissemination of information relating to the utilization of
alternative or innovative treatment technologies for response
actions. The Administrator shall establish and maintain a
central reference library for such information The mformation
maintained by t.Vip Administrator be available to th»
public, subject to the provisions of section 552 of title 5 of the
United States Code and section 1905 of title 18 of the United
States Code, and to other Government agencies in a manner
that will facilitate its dissemination; except, that upon a show-
ing satisfactory to the Administrator by anv person that any
information or portion thereof obtained under this subsection
by the Administrator directly or indirectly from such person,
would, if made public, divulge—
"(A) trade secrets; or
"(B) other proprietary information of such person,
the Administrator shall not disclose such information and
disclosure thereof shall be punishable under section 1905 of tide
18 of the United States Code. This subsection is not authority to
withhold information from Congress or any	of Con-
gress upon, the request of the chairman of such committee.
"(9) Training.—The Administrator is authorised and directed
to carry out, through the Office of Technology Demonstration, a
program of training and an evaluation of training needs for
each of the following:
"(A) Training in the procedures for the Handling and
removal of hazardous substances for employees who handle
hazardous substances.

-------
H.R. 2005—102
"(B) Training is the management of facilities at which
hazardous substances are located and in the evaluation of
the hazards to human health presented by such facilities
for State and local health and environment agency
personnel.
"(10) Definition.—For purposes of this subsection, the term
'alternative or innovative treatment technologies' means those
technologies, including proprietary or patented methods, which
permanently alter the composition of hazardous waste through
chemical, biological, or physical means so as to significantly
reduce the toxicity, mobility, or volume (or any combination
thereof) of the hazardous waste or contaminated materials
being treated. The term also includes technologies that
characterize or assess the extent of contamination, the chemical
and physical character of the contaminants, and the stresses
imposed by the contaminants on complex ecosystems at sites.
"(c) Hazardous Substance Research.—The Administrator may
conduct and support, through grants, cooperative agreements, and
contracts, research with respect to the detection, assessment, and
evaluation of the effects on and risks to human health of hazardous
substances and detection of hazardous substances in the environ-
ment The Administrator shall coordinate such research with the
Secretary of Health and Human Services, acting through the ad-
visory council established under this section, in order to avoid
duplication of e£fort
(d) University Hazardous Substance Research Centers.—
"(1) Grant program.—The Administrator shall make grants
to institutions of higher learning to establish and operate not
fewer than 5. hazardous substance research centers in the
United States. In carrying out the program under this subsec-
tion, the Administrator should seek to have established and
operated 10 hazardous substance research centers in the United
States.
"(2) Responsibilities of centers.—The responsibilities of
each hazardous substance research center established under
this subsection shall include, but net be limited to, the conduct
of research and training relating to the manufacture, use,
transportation, disposal, and management of hazardous sub-
stances and publication and dissemination of the results of such
research.
"(3) Applications.—Any institution of higher learning in-
terested in receiving a grant under this subsection shall submit
to the Administrator an application in such form and contain-
ing such information as the Administrator may require by
regulation.
(4) Selection criteria.—The Administrator shall select
recipients of grants-under this subsection on the basis of the
following criteria:
"(A) The hazardous substance research center shall be
located in a State which is representative of the needs of
the region in which such State is located for improved
hazardous waste management
"(B) The grant recipient shall be located in an area which
has experienced problems with hazardous substance
management
"(G There is available to the grant recipient for carrying
out thin subsection demonstrated research resources.

-------
H.R. 2005—103
"(D) The capability of the grant recipient to provide
leadership in mwfe-ing national and regional contributions to
the solution of both long-range and	hazardous
substance management problems.
"(E) The grant recipient shall make a commitment to
support ongoing hazardous substance research programs
with budgeted institutional funds of at least $100,000 per
year.
"(F) The grant recipient shall have an interdisciplinary
staff with demonstrated expertise in hazardous substance
management and research.
"(G) The grant recipient shall have a demonstrated abil-
ity to disseminate results of hazardous substance research
and educational programs through an interdisciplinary
continuing education program.
"(H) The projects which the grant recipient proposes to
.carry out under the grant are necessary and appropriate.
"(5) Maintenance of effort.—No grant may be made under
this subsection in any fiscal year unless the recipient of such
grant enters into such agreements with the Administrator as
the Administrator may require to ensure that such "recipient
will maintain its aggregate expenditures from all other sources
for establishing and operating a regional hazardous substance
research center and related research activities at or above the
average level of such expenditures in its 2 fiscal years preceding
the date of the enactment of this subsection.
"(6) Federal share.—The Federal share of a grant under this
subsection shall not exceed 80 percent of the costs of establish-
ing and operating the regional hazardous substance research
center and related research activities carried out by the grant
recipient.
"(7) Limitation on use of funds.—No funds made available
to carry out this subsection shall be used for acquisition of real
property (including buildings) or construction of any building.
"(8) Administration through the office of the adminis-
trator.—Administrative responsibility for carrying out this
subsection shall be in the Office of the Administrator.
"(9) Equitable distribution of funds.—The Administrator
shall allocate funds made available to carry out this subsection
equitably among the regions of the United States.
"(10) Technology transfer activities.—Not less than five
percent of the funds made available to carry out this subsection
for any fiscal year shall be available to carry out technology
transfer activities.
"(e) Report to Congress.—At the time of the submission of the
annual budget request to Congress, the Administrator shall submit
to the appropriate committees of the House of Representatives and
the Senate and to the advisory council established under subsection
(a), a report on the progress of the research, development, and
demonstration program authorized by subsection (b), including an
evaluation of each demonstration project completed in the preceding
fiscal year, findings with respect to the efficacy of such dem-
onstrated technologies in achieving permanent and significant
reductions in risk from hazardous wastes, the costs of such dem-
onstration projects, and the potential applicability of, and projected
costs for, such technologies at other hazardous substance sites.

-------
H.R. 2005—104
"(f) Saving Provision.—Nothing in this section shall be construed
to affect the provisions of the Solid Waste Disposal Act.
"(g) Small Business Participation.—The Administrator shall
ensure, to the matimiiwi extent practicable, an adequate oppor-
tunity for small business participation in the program established
by subjection (b).".
SEC 210. POLLUTION LIABILITY INSURANCE.
CERCLA is amended by adding the following new title at the end
thereof:
"TITLE IV—POLLUTION INSURANCE
-SEC 401. DEFINITIONS.
"As used in this title-^
"(1) Insurance.—The term 'insurance' means primary insur-
ance, excess insurance, reinsurance, surplus lines insurance,
and any other arrangement for shifting and distributing risk
which is determined to be insurance under applicable State or
Federal law.
"(2) Pollution liability.—The term 'pollution liability'
means liability for injuries arising from the release of hazard-
ous substances or pollutants or contaminants.
"(3) Rzsk retention group.—The term 'risk retention group'
means any corporation or other limited liability association
taxable as a corporation, or as an insurance company, formed
under the laws of any State—
"[A) whose primary activity consists of assuming and
spreading all, or any portion, of the pollution liability-of its
group members;
"(B) which is organized for the primary purpose of
conducting the activity described under subparagraph (A);
"(O which is chartered or licensed as an insurance com-
pany and authorized to engage in the business of insurance
under the laws of any State; and
"(D) which does not exclude any person from membership
in the group solely to provide for members of such a group a
competitive advantage over such a person.
"(4) Purchasing group.—The term 'purchasing group' means
any group of persons which has as one of its purposes the
purchase of pollution liability insurance on a group basis.
"(5) State.—The term 'State' means any State of the United
States, the District of Columbia, the Commonwealth of Puerto
Rico, Guam, American Samoa, the Virgin Islands, the Common-
wraith of the Northern Marianas, and any other territory or
possession over which the United States has jurisdiction.
"SEC 402. STATE LAWS: SCOPE OF TITLE.
"(a) State Laws.—Nothing in this title shall be construed to affect
either the tort law or the law governing the interpretation of
insurance contracts of any State. The definitions of pollution liabil-
ity and pollution liability insurance under any State law shall not
be applied for the purposes of this title, including recognition or
qualification of risk retention groups or purchasing groups.
"(b) Spope of Title.—The authority to offer or to provide insur-
ance under this title shall be limited to coverage of pollution liabil-
ity risks this title does not authorize a risk retention group or
purchasing group to provide coverage of any other line of insurance.

-------
H.R. 2005—105
"SEC. 403. RISK RETENTION GROUPS.
"(a) Exemption.—Except as provided in this section, a risk reten-
tion group shall be exempt from the following:
"(1) A State law, rule, or order which makes unlawful, or
regulates, directly or indirectly, the operation of a risk reten-
tion group.
"(2) A State law, rule, or order which requires or permits a
risk retention group to. participate in any insurance insolvency
guaranty association to which an insurer licensed in the State is
required to belong.
"(3) A State law, rule, or order which requires any insurance
policy issued to a risk retention group or any member of the
group to be countersigned by an insurance agent or broker
residing in the State.
"(4) A State law, rule, or order which otherwise discriminates
against a risk retention group or any of its members.
"(b) Exceptions.—
"(1) State laws generally applicable.—Nothing in subsec-
tion (a) shall be construed to affect the applicability of State
laws generally applicable to persons or corporations. The State
in which a risk retention group is chartered may regulate the
formation and operation of the group.
"(2) State regulations not subject to exemption.—Subsec-
tion (a) shall not apply to any State law which requires a risk
retention group to do any of the following:
"(A) Comply with the unfair claim settlement practices
law of the State.
"(B) Pay, on a nondiscriminatory basis, applicable pre-
mium and other taxes which are levied on admitted insur-
ers and surplus line insurers, brokers, or policyholders
under the laws of the State.
"(C) Participate, on a nondiscriminatory basis, in any
mechanism established or authorized under the law of the
State for the equitable apportionment among insurers of
pollution liability insurance losses and expenses incurred
on policies written through such mechanism.
"(D) Submit to the appropriate authority reports and
other information required of licensed insurers under the
laws of a State relating solely to pollution liability insur-
ance losses and expenses.
"(E) Register with and designate the State insurance
commissioner as its agent solely for the purpose of receiving
service of legal documents or process.
"(F) Furnish, upon request, such commissioner a copy
of any financial report submitted by the risk retention
group to the commissioner of the chartering or lir»»wging
jurisdiction.
"(G) Submit to an examination by the State insurance
commissioner in any State in which the group is doing
business to determine the group's financial condition, if—
"(i) the commissioner has reason to believe the risk
retention group is in a financially impaired condition;
and
"(ii) the commissioner of the jurisdiction in which the
group is chartered has not begun or has refused to
initiate an examination of the group.

-------
H.R. 2005—106
"(H) Comply with a lawful order issued in a delinquency
rrnrrmtinr commenced by the State insurance commis-
sioner if the commissioner of the jurisdiction in which the
group is chartered has failed to initiate such a proceeding
after notice of a fitting of financial impairment under
subparagraph (G).
"(c) Application of Exemptions.—The exemptions specified in
subsection (a) apply to—
"(1) pollution liability insurance coverage provided by a risk
.retention group for—
"(A) such group; or
"(B) any person who is a member of such group;
"(2) the sale of pollution liability insurance coverage for a risk
retention group; and
"(3) the provision of insurance related services or manage-
ment services for a risk retention group or any member of such
a group.
"(d) Agents or Brokebs.—A State may require that a person
acting, or offering to act, as an agent or broker for a risk retention
group obtain a license from that State, except that a State may not
impose any qualification or requirement which discriminates
against a nonresident agent or broker.
-SEC 404. PURCHASING GROUPS.
"(a) Exemption.—Except as provided in this section, a purchasing
group is exempt from the following;
"(1) A State law, rule, or order which prohibits the establish-
ment of a purchasing group.
"(2) A State law, rule, or order which makes it unlawful for
an insurer to provide or offer to provide insurance on a basis
providing, to a purchasing group or its member, advantages,
based on their loss and expense experience, not afforded to
other persons with respect to rates, policy forms, coverages, or
other matters.
"(3) A State law, rule, or order which prohibits a purchasing
group or its members from purchasing insurance on the group
basis described in paragraph (2) of this subsection.
"(4) A State law, rule, or order which prohibits a purchasing
group from obtaining insurance on a group basis because the
group has not been in existence for a minimum period of time or
because any member has not belonged to the group for a
minimum period of time.
"(5) A State law, rule, or order which requires that a purchas-
ing group must have a minimum number of members, common
ownership or affiliation, or a certain legal form.
"(6) A State law, rule, or order which requires that a certain
percentage of a purchasing group must obtain insurance on a
group basis.
"(7) A State law, rule, or order which requires that any
insurance policy issued to a purchasing group or any members
of the group be countersigned by an insurance agent or broker
residing in that State.
"(8) A State law, rule, or order which otherwise discriminate
against a purchasing group or any of its members.
"(b) Application of Exemptions.—The exemptions specified in
subsection (a) apply to the following:

-------
H.R. 2005—107
"(1) Pollution liability insurance, and comprehensive general
liability insurance which includes this coverage, provided to—
"(A) a purchasing group; or
"(B) any person who is a member of a purchasing group.
"(2) The sale of any one of the following to a purchasing group
or a member of die group:
"(A) Pollution liability insurance and comprehensive gen-
eral liability coverage.
"(B) Insurance related services.
"(C) Management services.
"(c) Agents ob Brokers.—A State may require that a person
acting, or offering to act, as an agent or broker for a purchasing
group obtain a license from that State, except that a State may not
impose any qualification or requirement which discriminates
against a nonresident agent or broker.
-SEC. 405. APPLICABILITY OF SECURITIES LAWS.
"(a) Ownership Interests.—The ownership interests of members
of a risk retention group shall be considered to be—
"(1) exempted securities for purposes of section 5 of the
Securities Act of 1933 and for purposes of section 12 of the
Securities Exchange Act of 1934; and
"(2) securities for purposes of the provisions of section 17 of
the Securities Act of 1933 and the provisions of section 10 of the
Securities Exchange Act of 1934.
"(b) .Investment Company Act.—A risk retention group shall not
be considered to be an investment company for purposes of the
Investment Company Act of 1940 (15 U.S.C. 80a-l et seq.).
"(c) Blue Sky Law.—The ownership interests of members in a
risk retention group shall not be considered securities for purposes
of any State blue sky law.".
SEC 211. DEPARTMENT OF DEFENSE ENVIRONMENTAL RESTORATION
PROGRAM.
(a) In General.—(1) Title 10, United States Code, is amended—
(A)	by redesignating section 2701 as section 2721; and
(B)	by inserting after chapter 159 the following new chapter
"CHAPTER 160—ENVIRONMENTAL RESTORATION
"Sec.
"2701. Environmental restoration program.
"2702. Research, development, ana demonstration program.
"2703. Environmental restoration transfer account.
"2704. Commonly found unregulated hazardous substances.
"2705. Notice of environmental restoration activities.
"2706. Annual report to Congress.
"2707. Definitions.
M§ 2701. Environmental restoration program
"(a) Environmental Restoration Program.—
"(1) In general.—The Secretary of Defense shall carry out a
program of environmental restoration at facilities under the
jurisdiction of the Secretary. The program shall be known as
the 'Defense Environmental Restoration Program'.
"(2) Application of section 120 or cercla.—Activities of the
program described in subsectioh (bXl) shall be carried out sub-
ject to, and in a manner consistent with, section 120 (relating to
Federal facilities) of the Comprehensive Environmental Re-

-------
H.R. 2005—108
sponse, Compensation, and Liability Act of 1980 (hereinafter in
this chapter referred to as 'CEBCLA') (42 U.S.C. 9601 et seq.).
"(3) Consultation with epa.—The program shall be carried
out in consultation with the Administrator of the Environ-
mental Protection Agency.
"(4) Administrative office within osd.—The Secretary
identify an office within the Office of the Secretary which gh«»n
have responsibility for carrying out the program.
"(b) Pbogbam Goals.—Goals of the program shall include the
following:
"(1) The identification, investigation, research and develop-
ment, and cleanup of contamination from hazardous substances,
pollutants, and contaminants.
"(2) Correction of other environmental damage, (such as detec-
tion and disposal of unexploded ordnance) which creates an
imminent and substantial endangerment to the public health or
welfare or to the environment.
"(3) Demolition and removal of unsafe buildings and struc-
tures, including buildings and structures of the Department of
Defense at sites formerly used by or under the jurisdiction of
the Secretary.
"(c) Responsibility for Response Actions.—
"(1) Basic responsibility.—The Secretary shall cany out (in
accordance with the provisions of this chapter and CERCLA) all
response actions with respect to releases of hazardous sub-
stances from each of the following:
"(A) Each facility or site owned by, leased to, or otherwise
possessed by the United States and under the jurisdiction of
the Secretary.
"(B) Each facility or site which was under the jurisdiction
of the Secretary and owned by, leased to, or otherwise
possessed by the United States at the time of actions lead-
ing to contamination by hazardous substances.
"(C) Each vessel owned or operated by the Department of
Defense.
"(2) Other responsible parties.—Paragraph (1) shall not
apply to a removal or remedial action if the Administrator has
provided for response action by a potentially responsible person
in accordance with section 122 of CERCLA (relating to
settlements).
"(3) State fees and charges.—The Secretary shall pay fees
and charges imposed by State authorities for permit services for
the disposal of hazardous substances on lands which are under
the jurisdiction of the Secretary to the same extent that non-
governmental entities are required to pay fees and charges
imposed by State authorities for permit services. The preceding
sentence shall not apply with respect to a payment that is the
responsibility of a lessee, contractor, or other private person.
"(d) Services of Other Agencies.—The Secretary may enter into
agreements on a reimbursable basis with any other Federal agency,
and on a reimbursable or other basis with any State or local
government agency, to obtain the services of that agency to assist
the Secretary in carrying out any of the Secretary's responsibilities
under this section. Services which may be obtained under this
subsection include the identification, investigation, and cleanup of
any off-site contamination possibly resulting from the release of a

-------
H.R. 2005—109
hazardous substance or waste at a facility under the Secretary's
jurisdiction.
"(e) Response Action Contractors.—The provisions of section
119 of GERCLA apply to response action contractors (as defined in
that section) who carry out response actions under this section
M§ 2702. Research, development, and demonstration program
"(a) Program.—As part of the Defense Environmental Restora-
tion Program, the Secretary of Defense shall carry out a program of
research, development, and demonstration with respect to hazard-
ous wastes. The program shall be carried out in consultation and
cooperation with the Administrator and the advisory council estab-
lished under section 311(aX5) of CERCLA. The program shall include
research, development, and demonstration with respect to each of
the following:
"(1) Means of reducing the quantities of hazardous waste
generated by activities and facilities under the jurisdiction of
the Secretary.
"(2) Methods of treatment, disposal, and management (includ-
ing recycling and detoxifying) of hazardous waste of the types
and quantities generated by current and former activities of the
Secretary and facilities currently and formerly under the juris-
diction of the Secretary.
"(3) Identifying more cost-effective technologies for cleanup of
hazardous substances.
"(4) Tozicological data collection and methodology on risk of
exposure to hazardous waste generated by the Department of
Defense.
"(5) The testing, evaluation, and field demonstration of any
innovative technology, processes, equipment, or related training
devices which may contribute to establishment of new methods
to control, contain, and treat hazardous substances, to be car-
ried out in consultation and cooperation with, and to the extent
possible in the same manner and standards as, testing, evalua-
tion, and field demonstration carried out by the Administrator,
acting through the office of technology demonstration of the
Environmental Protection Agency.
"(b) Special Permit.—The Administrator may use the authorities
of section 3005(g) of the Solid Waste Disposal Act (42 U.S.C. 6925(g))
to issue a permit for touting and evaluation which receives support
under this section.
"(c) Contracts and Grants.—The Secretary may enter into con-
tracts and cooperative agreements with, and make grants to, univer-
sities, public and private profit and nonprofit entities, and other
persons to carry out the research, development, and demonstration
authorized under this section. Such contracts may be entered into
only to the extent that appropriated funds are available for that
purpose.
"(d) Information Collection and Dissemination.—
"(1) In general.—The Secretary shall develop, collect, evalu-
ate, and disseminate information related to the use (or potential
use) of the treatment, disposal, and management technologies
that are researched, developed, and demonstrated under thii
section.
"(2) Role of epa.—The functions of the Secretary undei
paragraph (1) shall be carried out in cooperation and consult*
tion with the Administrator. To the extent appropriate anc

-------
H.R. 2005—110
agreed upon by the Administrator and the Secretary, the
Administrator snail evaluate and disseminate such information
through the office of technology demonstration of the Environ-
mental Protection Agency.
MS 2703. Environmental restoration transfer account
"(a) Establishment op Transfer Account.—
" "(1) Establishment.—There is hereby established in the
Department of Defense an account to be known as the 'Defense
Environmental Restoration Account' (hereinafter in this section
referred to as the 'transfer account"). All sums appropriated to
carry out the functions of the Secretary of Defense relating to
environmental restoration under this chapter or any other
provision of law shall be appropriated to the transfer account.
"(2) Requirement of authorization of appropriations.—No
funds may be appropriated to the transfer account unless such
sums have been specifically authorized by law.
"(3) AvAn.ABn.rrv of funds in transfer account.—Amounts
appropriated to the transfer account shall remain. available
until transferred under subsection (b).
"(b) Authority To Transfer to Other DOD' Accounts .—
Amounts in the transfer account shall be available to be transferred
by the Secretary to any appropriation account or fund of the Depart-
ment for obligation from that account or fund. Funds so transferred
shall be merged with and available for the same purposes and for
the same period as the account or fund to which transferred.
"(c) Obligation of Transferred Amounts.—Funds transferred
under subsection (b) may only .be obligated or expended from the
account or fund to which transferred in order to carry out the
functions of the Secretary under this chapter or environmental
restoration functions under any other provision of law.
"(d) Budget Reports.—In proposing the Budget for any fiscal year
pursuant to section 1105 of title 31, the President shall set forth
separately the amount requested for environmental restoration pro-
grams of the Department of Defense under this chapter or any other
Act.		
"(e) Amounts Recovered Under CERCLA.—Amounts recovered
under section 107 of CERCLA for response actions of the Secretary
shall be credited to the transfer account.
M§ 2704. Commonly found unregulated hazardous substances
"(a) Nones to HHS.—
"(1) In general.—The Secretary of Defense shall notify the
Secretary of Health and Human Services of the hazardous
substances which the Secretary of Defense determines to be the
most commonly found unregulated hazardous substances at
facilities under the Secretary's jurisdiction. The notification
shall be of not less than the 25 most widely used such
substances.
"(2) DErorrnoN.—In this subsection, the term 'unregulated
hazardous substance' means a hazardous substance—
"(A) for which no standard, requirement, criteria, or
limitation is in effect under the Toxic Substances Control
Act, the Safe Drinking Water Act, the Clean Air Act, or the
Clean Water Act; and
"(B) for which no water quality criteria are in effect
under any provision of the Clean Water Act.

-------
H.R. 2005—111
"(b) Toxicological Profiles.—The Secretary of Health and
Human Services shall take such steps as necessary to ensure the
timely preparation of toxicological profiles of each of the substances
of which the Secretary is notified under subsection (a). The profiles
of such substances shall include each of the following:
"(1) The examination, summary, and interpretation of avail-
able toxicological information and epidemiologic evaluations on
a hazardous substance in order to ascertain the levels of signifi-
cant human exposure for the substance and the associated
acute, subacute, and chronic health effects.
"(2) A determination of whether adequate information on the
. health effects of each substance is available or in the process of
development to determine levels of exposure which present a
significant risk to human health of acute, subacute, and chronic
health effects.
"(3) Where appropriate, toxicological testing directed toward
determining the marinnim exposure level of a hazardous sub-
stance that is safe for humans.
"(c) DOD Support.—The Secretary of Defense shall transfer to the
Secretary of Health and Human Services such toxicological data,
such sums from amounts appropriated to the Department of De-
fense, and such personnel of the Department of Defense as may be
necessary (1) for the preparation of toxicological profiles under
subsection (b) or (2) for other health related activities under section
104(i) of CERCLA. The Secretary of Defense and the Secretary of
Health and Human Services shall enter into a memorandum of
understanding regarding the	in which this section shall be
carried out,	the manner for transferring funds and person-
nel and for coordination of activities under this section.
"(d) EPA Health Advibories.—
"(1) Preparation.—At the request of the Secretary of De-
fense, the Administrator shall, in a timely manner, prepare
health advisories on hazardous substances. Such an advisory
shall be prepared on each hazardous substance—
"(A) for which no advisory exists;'
"(B) which is found to threaten drinking water, and
"(O which is wmnnating from a facility under the juris-
diction of the Secretary.
"(2) Content of health advisories.—Such health advisories
shall provide specific advice on the levels of contaminants in
drinking water at which adverse health effects would not be
nntiripatpd and which include a margin of safety so as to
protect the most sensitive members of the population at risk.
The advisories shall provide data on one-day, 10-day, and
longer-term exposure periods where available toxicological data
exist.
"(3) DOD support for health advisories.—The Secretary of
Defense shall transfer -to Administrator such toxicological
data, such sums from amounts appropriated to the Department
of Defense, and such personnel of the Department of Defense as
may be necessary for the preparation of such health advisories.
The Secretary and the Administrator shall enter into a memo-
randum of understanding regarding the manner in which this
subsection shall be earned out, innlmting the manner for
transferring funds and personnel and for coordination of activi-
ties under this subsection.

-------
H.R. 2005—112
"(e) Cross Reference.—Section 104(i) of CERCLA applies to facili-
ties under the jurisdiction of the Secretary of Defense in the manner
prescribed in that section.		
"(f) Functions of HHS To Be Carried Out Through ATSDR.—
The functions of the Secretary of Health and Human Services under
this section shall be carried out through the Administrator of the
Agency of Toxic Substances and Disease Registry of the Department
of Health and Human Services established under section 104(i) of
CERCLA.
"§ 2705. Notice of environmental restoration activities
"(a) Expedited Notice.—The Secretary of Defense shnll take such
actions as necessary to ensure that the regional offices of the
Environmental Protection Agency and appropriate State and local
authorities for the State in which a facility under the Secretary's
jurisdiction is located receive prompt notice of each of the following:
"(1) The discovery of releases or threatened releases of
hazardous substances at the facility.
"(2) The extent of the threat to public health and the environ-
ment which may be associated with any such release or threat-
ened release.
"(3) Proposals made by the Secretary to carry out response
actions with respect to any such release or threatened release.
"(4) The initiation of any response action with respect to such
release or threatened release and the commencement of each
distinct phase of such activities.
"(b) Comment by EPA and State and Local Authorities.—
"(1) Release notices.—The Secretary shall ensure that the
Administrator of the Environmental Protection Agency and
appropriate State and local officials have an adequate oppor-
tunity to comment on notices under paragraphs (1) and (2) of
subsection (a).
"(2) Proposals for response actions.—The Secretary shall
require that an adequate opportunity for timely review and
comment be afforded to the Administrator and to appropriate
State and local officials after making a proposal referred to in
subsection (aX3) and before undertaking an activity or action
referred to in subsection (aX4). The preceding sentence does not
apply if the action is an emergency removal taken because of
imminent and substantial gnrinngrwrnpnt to human	or
the environment and consultation would be impractical.
"(c) Technical Review Committee.—Whenever possible and prac-
tical, the Secretary shall establish a tprhniml review committee to
review and comment on Department of Defense actions and pro-
posed actions with respect to releases or threatened releases of
hazardous substances at installations. Members of any such commit-
tee shall include at least one representative of the Secretary, the
Administrator, and appropriate State and local authorities ana. shall
include a public representative of the community involved.
"§ 2706. Annual report to Congress
"(a) Report on Progress in Implementation.—The Secretary of
Defense shall submit to Congress a report each fiscal year describing
the progress made by the Secretary during the preceding fiscal year
in implementing the requirements of this chapter.
"(b) Matters To Be Included.—Each such report shall include
the following:

-------
H.R. 2005—113
"(1) A statement for each installation under the jurisdiction of
the Secretary of the number of individual facilities at which a
hazardous substance has been identified.
"(2) The status of response actions contemplated or under-
taken at each such facility.
"(3) The specific cost estimates and budgetary proposals
involving response actions contemplated or undertaken at each
such facility.
"(4) A report on progress on conducting response actions at
facilities other than facilities on the National Priorities List.
"§ 2707. Definitions
"In this chapter
"(1) The terms 'environment', 'facility', 'hazardous substance',
'person', 'release', 'removal', 'response', 'disposal', and 'hazard-
ous waste' have the meanings given those terms in section 101
of CERCLA (42 U.S.C. 9601).
"(2) The term 'Administrator' means the Administrator of the
Environmental Protection Agency.".
(2)	The tables of chapters at the beginning of subtitle A, and at the
beginning of part IV of subtitle A, of such title are each amended by
inserting after the item relating to chapter 159 the following new
item:
"160. Environmental Restoration					 2701".
(3)	The table of sections at the beginning of chapter 161 of such
title is amended to reflect the redesignation made by paragraph
(1XA).
(b) Military Construction Projects.—(1) Chapter 169 of title 10,
' United States Code, is amended by inserting at the end of sub-
chapter I the following new section:
"§ 2810. Construction projects for environmental response actions
"(a) Subject to subsection (b), the Secretary of Defense may carry
out a military construction project not otherwise authorized by law
(or may authorize the Secretary of a military department to carry
out such a project) if the Secretary of Defense determines that the
project is necessary to carry out a response action under chapter 160
of this title or under the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980 (42 U.S.C. 9601 et seq.).
"(bXl) When a decision is made to carry out a military construc-
tion project under this section, the Secretary of Defense shall submit
a report in writing to the appropriate committees of Congress on
that decision. Each such report shall include—
"(A) the justification for the project and the current estimate
of the cost of the project; and
"(B) the justification for carrying out the project under this
section.
"(2) The project may then be carried out only after the end of the
21-day period beginning on the date the notification is received by
such committees.
"(c) In this section, the term 'response action' has the meaning
given that term in section 101 of the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980 (42 U.S.C.
9601)."

-------
H.R.2005—114
(2) The table of sections at the beginning of subchapter I of such
chapter is amended by adding at the end thereof the following new
item:
"2810. Construction piujecto for environments! response actions.".
(c) Effective Date.—Section 2703(aX2) of title 10, United States
Code, as added by subsection (a), shall apply with respect to funds
appropriated for fiscal years hog-inning- after September 30, 1986.
SEC. 212. REPORT AND OVERSIGHT REQUIREMENTS.
Section 301 of CERCLA is amended by adding at the end thereof
the following new subsection:
"(h) Report and Oversight Requirements.—
"(1) Annual report by epa.—On January 1 of each year the
Administrator of the Environmental Protection Agency shall
submit an annual report to Congress of such Agency on the
progress achieved in implementing this Act during the preced-
ing fiscal year. In addition such report shall specifically include
each of the following:
"(A) A detailed description of each feasibility study car-
ried out at a facility under title I of this Act
. "(B) The status and estimated date of completion of each
such study.
"(C) Notice of each such study which will not meet a
previously published schedule for completion and the new
estimated date for completion.
"(D) An evaluation of newly developed feasible and
achievable permanent treatment technologies.
"(E) Progress made in reducing the number of facilities
subject to review under section 121(c).
"(F) A report on the status of all remedial and enforce-
ment actions undertaken during the prior fiscal year,
including a comparison to remedial and enforcement ac-
tions undertaken in prior fiscal years.
"(G) An estimate of the amount of resources, including
the number of work years or personnel, which would be
necessary for each department, agency, or instrumentality
which is carrying out any activities of this Act to complete
the implementation of all duties vested in the department,
agency, or instrumentality under this Act
"(2) Review by inspector general.—Consistent with the
authorities of the Inspector General Act of 1978 the Inspector
General of the Environmental Protection Agency shall review
any report submitted under paragraph (1) related to EPA's
activities for reasonableness and accuracy and submit to Con-
gress, as a part of such report a report on the results of such
review.
"(3) Congressional oversight.—After receiving the reports
under paragraphs (1) and (2) of this subsection in any calendar
year, the appropriate 'authorizing committees of Congress shall
conduct oversight hearings to ensure that this Act is being
implemented according to the purposes of this Act and congres-
sional intent in enacting this Act.".
SEC 213. LOVE CANAL PROPERTY ACQUISITION.
(a) Congressional Findings.—

-------
H.R. 2005—115
(1)	The area known as Love Canal located in the city of
Niagara Falls and the town of Wheatfield, New York, was the
first toxic waste site to receive national attention. As a result of
that attention Congress investigated the problems associated
with toxic waste sites and enacted GERCLA to deal with these
problems.
(2)	Because Love Canal came to the Nation's attention prior to
the passage of CERCLA and because the fund under CERCLA
was not available to compensate for all of the hardships en-
dured by the citizens in the area, Congress has determined that
special provisions are required. These provisions do not affect
the lawfulness, implementation, or selection of any other re-
sponse actions at Love Canal or at any other facilities.
(b) Amendment of Superfund.—Title HI of CERCLA is amended
by adding the following new section at the end thereof:
"SEC 312. LOVE CANAL PROPERTY ACQUISITION.
"(a) Acquisition of Property in Emergency Declaration
Area.—The Administrator of the Environmental Protection Agency
(hereinafter referred to as the 'Administrator') may make grants not
to exceed $2,500,000 to the State of New York (or to any duly
constituted public agency or authority thereof) for purposes of ac-
quisition of private property in the Love Canal Emergency Declara-
tion Area. Such acquisition shall include (but shall not be limited to)
all private property within the Emergency Declaration Area, includ-
ing non-owner occupied residential properties, commercial, indus-
trial, public, religious, non-profit, and vacant properties.
"(b) Procedures for Acquisition.—No property shall be acquired
pursuant to this section unless the property owner voluntarily
agrees to such acquisition. Compensation for any property acquired
pursuant to this section shall be based upon the fair market value of
the property as it existed prior to the emergency declaration. Valu-
ation procedures for property acquired with funds provided under
this section shall be in accordance with those set forth in the
agreement entered into between the New York State Disaster
Preparedness Commission and the Love Canal Revitalization
Agency on October 9,1980.
"(c) State Ownership.—The Administrator shall not provide any
funds under this section for the acquisition of any properties pursu-
ant to this section unless a public agency or authority of the State of
New York first enters into a cooperative agreement with the
Administrator providing assurances deemed adequate by the
Administrator that the State or an agency created under the laws of
the State shall take title to the properties to be so acquired.
"(d) Maintenance of Property. —The Administrator enter
into a cooperative agreement with an appropriate public agency or
authority of the State of New York under which the Administrator
shall maintain or arrange for the maintenance of all properties
within the Emergency Declaration Area that have been acquired by
any public agency or authority of the State. Ninety (90) percent of
the costs of such maintenance shall be paid by the Administrator.
The remaining portion of such costs shall be paid by the State
(unless a credit is available under section 104(c)). The Administrator
is authorized, in his discretion, to provide technical assistance to any
public agency or authority of the State of New York in order to
implement the recommendations of the habitability and land-use

-------
H.R.2005—116
study in order to put the land within the Emergency Declaration
Area to its best use.
"(e) HABRABiLirr and Land Use Study.—The Administrator
shall conduct or cause to be conducted a habitability and land-use
study. The study shall—
"(1) assess the risks associated with inhabiting of the Love
Canal Emergency Declaration Area;
"(2) compare the level of hazardous waste contamination in
that Area to that present in other comparable communities; and
"(3) assess the potential uses of the land within the Emer-
gency Declaration Area, including but not limits to residential,
industrial, commercial and recreational, and the risks associ-
ated with such potential uses.
The Administrator shall publish the findings of such study and shall
work with the State of New York to develop recommendations based
upon the results of such study.
"(f) Funding.—For purposes of section 111 [and 221(c) of this
Act], the expenditures authorized by this section shall be treated as
a cost specified in section 111(c).
"(g) Response.—The provisions of this section shall not affect the
implementation of other response actions within the Emergency
Declaration Area that the Administrator has determined (before
enactment of this section) to be necessary to protect the public
health or welfare or the environment
"(h) Definitions.—For purposes of this section:
"(1) Emergency declaration area.—The terms 'Emergency
Declaration Area' and 'Love Canal Emergency Declaration
Area' mean the Emergency Declaration Area as defined in
section 950, paragraph (2) of the General Municipal Law of the
State of New York, Chapter 259, Laws of 1980, as in effect on
the date of the enactment of this section.
"(2) Private property.—As used in subsection (a), the term
'private property' means all property which is not owned by a
department, agency, or instrumentality of—
"(A) the United States, or .
"(B) the State of New York (or any public agency or
authority thereof).".
TITLE m—EMERGENCY PLANNING AND COMMUNITY
RIGHT-TO-KNOW
SEC 300. SHORT TITLE; TABLE OF CONTENTS.
(a)	Short Title.—This title may be cited as the "Emergency
-Planning and Community Right-To-Know Act of 1986".
(b)	Table of Contents.—The table of contents of this title is as
follows:
Sec. 300. Short title; table of contents.
Subtitle A—Emergency Planning and Notification
Sec. 301. Establishment of State commissions, planning districts, and local commit-
tees.
Sec. 302. Substances and facilities coveied and notification.
Sec. 303. Comprehensive emergency response plans.
Sec. 304. Emergency notification.
Sec. 305. Emergency training and review of emergency systems.
Subtitle B—Reporting Requirements
Sec. 311. Material safety data sheets.

-------
H.R. 2005—117
Sec. 312. Emergency and hazardous chemical inventory forms.
Sec. 313. Toxic chemical release forms.
Subtitle C General Provisions
See 321. Relationship to other law.
Sec. 322. Trade secrete.
Sec. 323. Provision of information to health professionals, doctors, and nurses.
Sec 324. Public availability of plans, data sheets, forms, and followup notices.
Sec. 325. Enforcement.
Sec 326. Civil Actions.
Sec. 327. Exemption.
Sec. 328. Regulations.
Sec. 329. Definitions.
Sec. 330. Authorization of appropriations.
Subtitle A—Emergency Planning and Notification
SEC 301. ESTABLISHMENT OF STATE COMMISSIONS. PLANKING DIS-
TRICTS. AND LOCAL COMMITTEES.
(a)	Establishment of State Emergency Response Commis-
sions.—Not later than six months after the date of the enactment of
this title, the Governor of each State shall appoint a State emer-
gency response commission. The Governor may designate as the
State emergency response commission one or more existing emer-
gency response organizations that are State-sponsored or appointed.
The Governor shall, to the extent practicable, appoint persons to the
State emergency response commission who have technical expertise
in the emergency response field. The State emergency response
commission shall appoint local emergency .planning committees
under subsection (c) and shall supervise and coordinate the activities
of such committees. The State emergency response commission shall
establish procedures for receiving and processing requests from the
public for information under section 324, including tier II informa-
tion under section 312. Such procedures shall include the designa-
tion of an official to serve as coordinator for information. If the
Governor of any State does not designate a State emergency
response commission within such period, the Governor shall operate
as the State emergency response commission until the Governor
makes such designation.
(b)	Establishment of Emergency Planning Districts.—Not
later than nine months after the date of the enactment of this title,
the State emergency response commission shall designate emer-
gency planning districts in order to facilitate preparation and
implementation of emergency plans. Where appropriate, the State
emergency response commission may designate existing political
subdivisions or multijurisdictional planning organizations as such
districts. In emergency planning areas that involve more than one
State, the State emergency response commissions of all potentially
affected States may designate. emergency planning districts and
local emergency planning committees by agreement In making
such designation, the State emergency response commission shall
indicate which facilities subject to the requirements of this subtitle
are within such emergency planning district
(c)	Establishment of Local Emergency Planning Commit-
tees.—Not later than 30 days after designation of emergency plan-
ning districts or 10 months after the date of the enactment of this
title, whichever is earlier, the State emergency response commission
shall appoint members of a local emergency planning committee for
each emergency planning district Each committee shall include, at

-------
H.R. 2005—118
a minimum, representatives from each of the following groups or
organisations; elected State and local officials; law enforcement,
civil defense, firefighting, first aid, health, local environmental,
hospital, and transportation personnel; broadcast and print media;
community groups; and owners and operators of facilities subject to
the requirements of this subtitle. Such committee shall appoint a
chairperson and shall establish rules by which the committee shall
function. Such rules shall include provisions for public notification
of committee activities, public meetings to discuss the emergency
plan, public comments, response to such comments by the commit-
tee, and distribution of the emergency plan. The local emergency
planning committee shall establish procedures for receiving and
processing requests from the public for information under section
324, including tier II information under section 312. Such proce-
dures shall include the designation of an official to serve as
coordinator for information.
(d) Revisions.—A State emergency response commission may
revise its designations and appointments under subsections (b) and
(c) as it deems appropriate. Interested persons may petition the
State emergency response commission to modify the membership of
a local emergency planning committee.
SEC 302. SUBSTANCES AND FACILITIES COVERED AND NOTIFICATION.
(a) Substances Covered.—
(1)	In general.—A substance is subject to the requirements of
this subtitle if the substance is on the list published under
paragraph (2).
(2)	List of extremely hazardous substances.—Within 30
days after the date of the enactment of this title, the Adminis-
trator shall publish a list of extremely hazardous substances.
The list shall be the same as the list of substances published in
November 1985 by the Administrator in Appendix A of the
"Chemical Emergency Preparedness Program Interim
Guidance".
(3)	Thresholds.—(A) At the time the list referred to in para-
graph (2) is published the Administrator shall—
(i)	publish an interim final regulation establishing a
threshold planning quantity for each substance on the list,
taking into account the criteria described in paragraph (4),
and
(ii)	initiate a rulemaking in order to publish final regula-
tions establishing a threshold planning quantity for each
substance on the list
(B) The threshold planning quantities may, at the Adminis-
trator's discretion, be based on classes of chemicals or categories
of facilities.
(Q If the Administrator fails to publish an interim final
regulation establishing a threshold planning quantity for a
substance within 30 days after the date of the enactment of this
title, the threshold planning quantity for the substance shall be
2 pounds until such time as the Administrator publishes regula-
tions establishing a threshold for the substance.
. (4) Revisions.—The Administrator may revise the list and
thresholds under paragraphs (2) and (3) from time to time. Any
revisions to the list shall take into account the toxicity, reactiv-
ity, volatility, dispersability, combustability, or flammabiiity of
a substance. For purposes of the preceding sentence, the term

-------
H.R. 2005—119
"toxicity" shall include any short- or long-term health effect
which may result from a short-term exposure to the substance.
(b)	Facilities Covered.—(1) Except as provided in section 304, a
facility is subject to the requirements of this subtitle if a substance
on the list referred to in subsection (a) is present at the facility in an
amount in excess of the threshold planning quantity established for
such substance.
(2) For purposes of emergency planning, a Governor or a State
emergency response commission may designate additional facilities
which shall be subject to the requirements of this subtitle, if such
designation is made after public notice and opportunity for com-
ment The Governor or State emergency response commission shall
notify the facility concerned of any facility designation under this
paragraph.
(c)	Emergency Planning Notification.—Not later than seven
months after the date of the enactment of this title, the owner or
operator of each facility subject to the requirements of this subtitle
by. reason of subsection (bXl) shall notify the State emergency
response commission for the State in which such facility is located
that such facility is subject to the requirements of this subtitle.
Thereafter, if a substance on the list of extremely hazardous sub-
stances referred to in subsection (a) first becomes present at such
facility in excess of the threshold planning quantity established for
such substance, or if there is a revision of such list and the facility
has present a substance on the revised list in excess of the threshold
planning quantity established for such substance, the owner or
operator of the facility shall notify the State emergency response
commission and the local emergency planning committee within 60
days after such acquisition or revision that such'facility is subject to
the requirements of this subtitle.
(d)	Notification of Administrator.—The State emergency
response commission shall notify the Administrator of facilities
subject to the requirements of this subtitle by notifying the Adminis-
trator of—
(1)	each notification received from a facility under subsection
(c), and
(2)	each facility designated by the "Governor or State emer-
gency response commission under subsection (bX2).
SEC. 303. COMPREHENSIVE EMERGENCY RESPONSE PLANS.'
(a)	Plan Required.—Each local emergency planning committee
shall complete preparation of an emergency plan in accordance with
this section not later than two years after the date of the enactment
of this title. The committee shall review such plan once a year, or
more frequently as changed circumstances in the community or at
any facility may require.
(b)	Resources.—Each local emergency planning committee shall
evaluate the need for resources necessary to develop, implement,,
and exercise the emergency plan, and shall make recommendations
with respect to additional resources that may be required the
means for providing such additional resources.
(c)	Plan Provisions.—Each emergency plan shall include (but is
not limited to) each of the following:
(1) Identification of facilities subject to the requirements of
this subtitle that are within the emergency planning district,
identification of routes likely to be used for the transportation
of substances on the list of extremely hazardous substances

-------
H.R. 2005—120
referred to in section 302(a), and identification of additional
facilities contributing or subjected to additional risk due to their
ents of this sub*
y facility owners
and operators and local emergency and medical personnel to
respond to any release of such substances.
(3)	Designation of a community emergency coordinator and
facility emergency coordinators, who shall make determinations
necessary to implement the plan.
(4)	Procedures providing reliable, effective, and timely
notification by the facility emergency coordinators and the
community emergency coordinator to persons designated in the
emergency plan, and to the public, that a release has occurred
(consistent with the emergency notification requirements of
section 304).
(5)	Methods for determining the occurrence of a release, and
the area or population likely to be affected by such release.
(6)	A description of emergency equipment and facilities in the
community and at each facility in the community subject to the
requirements of this subtitle, and an identification of the per-
sons responsible for such equipment and facilities.
(7)	Evacuation plans, including provisions for a precautionary
evacuation and alternative traffic routes.
(8)	Training programs, including schedules for training of
local emergency response and medical personnel.
(9)	Methods and schedules for exercising the emergency plan.
(d)	Providing of Information.—For each facility subject to the
requirements of this subtitle:
(1)	Within 30 days after establishment of a local emergency
planning committee for the emergency planning district in
which such facility is located, or within 11 months after the date
of. the enactment of this title, whichever is earlier, the owner or
operator of the facility shall notify the emergency planning
committee (or the Governor if there is no committee) of a
facility representative who will participate in the emergency
planning process as a facility emergency coordinator.
(2)	The owner or operator of the facility shall promptly inform
the emergency planning committee of any relevant changes
occurring at such facility as such changes occur or are expected
to occur.
(3)	Upon request from the emergency planning committee,
the owner or operator of the facility shall promptly provide
information to such committee necessary for developing and
implementing the emergency plan.
(e)	Review by the State Emergency Response Commission.—
After completion of an emergency plan under subsection (a) for an
emergency planning district, the local emergency planning commit-
tee shall submit a copy of the plan to the State emergency response
commission of each State in which such district is located. The
commission shall review the plan and make recommendations to the
committee on revisions of the plan that may be necessary to ensure
coordination of such plan with emergency response plans of other
emergency planning districts. To the maximum extent practicable,
such review shall not delay implementation of such plan.
(f)	Guidance Documents.—The national response team, as estab-
lished pursuant to the National Contingency Plan as established

-------
H.R. 2005—121
under section 105 of the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980 (42 U.S.C. 9601 et seq.),
shall publish guidance documents for preparation and implementa-
tion of emergency plans. Such documents shall be published not
later than five months after the date of the enactment of this title.
(g) Review op Plans by Regional Response Teams.—The
regional response teams, as established pursuant to the National
Contingency Plan as established under section 105 of the Com-
prehensive Environmental Response, Compensation, and Liability
Act of 1980 (42 U.S.C. 9601 et seq.), may review and comment upon
an emergency plan or other issues related to preparation,
implementation, or exercise of such a plan upon request of a local
emergency planning committee. Such review shall not delay
implementation of the plan.
SEC. 304. EMERGENCY NOTIFICATION.
(a) Types op Releases.—
(1)	302(a) SUBSTANCE WHICH REQUIRES CERCLA NOTICE.—If a
release of an extremely hazardous substance referred to in
section 302(a) occurs from a facility at which a hazardous
chemical is produced, used, or stored, and such release requires
a notification under section 103(a) of the Comprehensive
Environmental Response, Compensation, and Liability Act of
1980 (hereafter in this section referred to as "CERCLA") (42
U.S.C. 9601 et seq.), the owner or operator of the facility shall
immediately provide notice as described in subsection (b).
(2)	Other 802(a) substance.—If a release of an extremely
hazardous substance referred to in section 302(a) occurs from a
facility at which a hazardous chemical is produced, used, or
stored, and such release is not subject to the notification
requirements under section 103(a) of CERCLA, the owner or
operator of the facility shall immediately provide notice as
described in subsection (b), but only if the release—
(A)	is not a federally permitted release as defined in
section 101(10) of CERCLA,
(B)	is in an amount in excess of a quantity which the
Administrator has determined (by regulation) requires
notice, and
(C)	occurs in a manner which would require notification
under section 103(a) of CERCLA.
Unless and until superseded by regulations establishing a quan-
tity for an extremely hazardous substance described in
this paragraph, a quantity of 1 pound shall be deemed that
quantity the release of which requires notice as described in
subsection (b).
(3)	NoN-302(a) substance which requires cercla notice.—If
a release of a substance which is not on the list referred to in
section 302(a) occurs at a facility at which a hazardous
is produced, used, or stored, and such release requires notifica-
tion under section 103(a) of CERCLA, the owner or operator
shall provide notice as follows:
(A)	If the substance is one for which a reportable quantity
has been established under section 102(a) of CERCLA, the
owner or operator shall provide notice as described in
subsection (b).
(B)	If the substance is one for which a reportable quantity
has not been established under section 102(a) of CERCLA—

-------
H.R. 2005—122
(i)	Until April 30, 1988, the owner or operator
provide, for releases of one pound or more of the sub-
stance, the same notice to the community emergency
coordinator for the local emergency piAwning commit-
tee, at the same time and in the same form, as notice is
provided to. the National Response Center under sec-
tion 103(a) of CERCLA.
(ii)	On and after April 30,1988, the owner or operator
shall provide, for releases of one pound or more of the
substance, the notice as described in subsection (b).
(4) Exempted releases.—This section does not apply to any
release which results in exposure to persons solely within the
site or sites on which a facility is located.
(b)	Notification.—
(1)	Recipients of notice.—Notice required under subsection
(a) shall be given immediately after the release by the owner or
operator of a facility (by such means as telephone, radio, or in
person) to the community emergency coordinator for the local
emergency planning committees, if established pursuant to sec-
tion 301(c), for-any area likely to be affected by the release and
to the State emergency planning commission of any State likely
to be affected by the release. With respect to transportation of a
substance subject to the requirements of this section, or storage
incident to such transportation, the notice requirements of this
section with respect to a release shall be satisfied by dialing 911
or, in the absence of a 911 emergency telephone number, calling
the operator.
(2)	Contents.—Notice required under subsection (a) shall
include each of the following (to the extent known at the time of
the notice and so long as no delay in responding to the emer-
gency results):
(A)	The	name or identity of any substance
involved in the release.
(B)	An indication of whether the substance is on the list
referred to in section 302(a).
(O An estimate of the quantity of any such substance
that was released into the environment
(D)	The time and duration of the release.
(E)	The Tritium or media into which the release
occurred.
(F)	Any known or anticipated acute or chronic health
risks associated with the emergency and, where appro-
priate, advice regarding medical attention necessary for
exposed individuals.
(G)	Proper precautions to take as a result of the release,
including evacuation (unless such information is readily
available to the community emergency coordinator pursu-
ant to the emergency plan).
(H)	The name and telephone number of the person or
persons to be contacted for further information.
(c)	Followup Emergency Notice.—As soon as practicable after a
release which requires notice under subsection (a), such owner or
operator shall provide a written followup emergency notice (or
notices, as more information becomes available) setting forth and
updating the information required under subsection (b), and includ-
ing additional information with respect to—
(1) actions taken to respond to and contain the release,

-------
H.R. 2005—123
(2)	any known or anticipated acute or chronic health risks
associated with the release, and
(3)	where appropriate, advice regarding medical attention
necessary for exposed individuals.
(d) Transportation Exemption Not Applicable.—The exemption
provided in section 327 (relating to transportation) does not apply to
this section.
SEC 305. EMERGENCY TRAINING AND REVIEW OF EMERGENCY SYSTEMS.
(a)	Emergency Training.—
(1)	Programs.—Officials of the United States Government
carrying out existing Federal programs for emergency training
are authorized to specifically provide training and education
programs for Federal, State, and local personnel in hazard
mitigation, emergency preparedness, fire prevention and con-
trol, disaster response, long-term disaster recovery, national
security, technological and natural hazards, and emergency
processes. Such programs shall provide special emphasis for
such training and education with respect, to hazardous
chemicals.
(2)	State and local program support.—There is authorized
to be appropriated to the Federal Einergency Management
Agency for each of the fiscal years 1987, 1988, 1989, and 1990,
$5,000,000 for making grants to support programs of State and
local governments, and to support university-sponsored pro-
grams, which are designed to improve emergency planning,
greparedness, mitigation, response, and recovery capabilities,
uch programs shall provide special emphasis with respect to
emergencies associated with hazardous chemicals. Such grants
may not exceed 80 percent of .the cost of any such program. The
remaining 20 percent of such costs shall be funded from non-
Federal sources.
(3)	Other programs.—Nothing in this section shall affect the
availability of appropriations to the Federal Emergency
Management Agency for any programs carried out by such
agency other than the programs referred to in paragraph (2).
(b)	Review of Emergency Systems.—
(1)	Review.—The Administrator shall initiate, not later than
30 days after the date of the enactment of this title, a review of
emergency systems for monitoring, detecting, and preventing
releases of extremely hazardous substances at representative
domestic facilities that produce, use, or store extremely hazard-
ous substances. The Administrator may select representative
extremely hazardous substances from the substances on the list
referred to in section 302(a) for the purposes of this review. The
Administrator shall report interim finding* to the Congress not
later than seven months after such date of enactment, and issue
a final report of findings and recommendations to the Congress
not later than 18 months after such date of enactment Such
report shall be prepared in consultation with the States and
appropriate Federal agencies.
(2)	Report.—The report required by this subsection shall
include the Administrator's finding* regarding each of the
following:
(A) The status of current technological capabilities to (i)
monitor, detect, and prevent, in a timely manner, signifi-
cant releases of extremely hazardous substances, (ii) deter-

-------
H. R. 2005—124
mine the magnitude and direction of the hazard posed by
each release, (iii) identify specific substances, (iv) provide
data on the specific chemical composition of such releases,
and (v) determine the relative concentrations of the
constituent substances.
(B) The status of public emergency alert devices or sys-
tems for providing timely and effective public warning of
an accidental release of extremely hazardous substances
into the environment, including releases into the at-
mosphere, surface water, or groundwater from facilities
that produce, store, or use significant quantities of such
extremely hazardous substances.
(O The technical and economic feasibility of establishing,
maintaining, and operating perimeter alert systems for
detecting releases of such extremely hazardous substances
into the atmosphere, surface water, or groundwater, at
facilities that manufacture, use, or store significant quan-
tities of such substances.
(3) Recommendations.—The report required by this subsec-
tion shall also include the Administrator's recommendations
for—
(A)	initiatives to support the development of new or
improved technologies or systems that would facilitate the
timely monitoring, detection, and prevention of releases of
extremely hazardous substances, and
(B)	improving devices or systems for effectively alerting
the public in a timely manner, in the event of an accidental
release of such extremely hazardous substances.
Subtitle B—Reporting Requirements
SEC. 31L MATERIAL SAFETY DATA SHEETS.
(a) Basic Requirement.—
(1)	Submission of msds or list.—The owner or operator of
any facility which is required to prepare or have available a
material safety data sheet for a hazardous chemical under the
Occupational Safety and Health Act of 1970 and regulations
promulgated under that Act (15 U.S.C. 651 et seq.) shall submit
a material safety data sheet for each such chemical, or a list of
such chemicals as described in paragraph (2), to each of the
following;
(A)	The appropriate local emergency planning committee.
(B)	The State emergency response commission.
(O The fire department with jurisdiction over the facility.
(2)	Contents of list.—(A) The list of chemicals referred to in
paragraph (1) shall include each of the following:
(i)	A list of the hazardous chemicals for which a material
safety data sheet is required under the Occupational Safety
and Health Act of 1970 and regulations promulgated under
that Act, grouped in categories of health and physical
hazards as set forth under such Act and regulations
promulgated under such Act, or in such other categories as
the Administrator may prescribe under subparagraph (B).
(ii)	The chemical name or the common name of each such
chemical as provided on the material safety data sheet.

-------
H.R. 2005—125
(iii) Any hazardous component of each such chemical as
provided on the material safety data sheet.
(B) For purposes of the list under this paragraph, the
Administrator may modify the categories of health and physical
hazards as set forth under the Occupational Safety ana Health
Act of 1970 and regulations promulgated under that Act by
requiring information to be reported in terms of groups of
hazardous chemicals which present similar hazards in an
emergency.
(3) Treatment of mixtures.—An owner or operator may
meet the requirements of this section with respect to a hazard-
ous chemical which is a mixture by doing one of the following;
(A)	Submitting a material safety data sheet for, or identi-
fying on a list, each element or compound in the mixture
which is a hazardous chemical. If more than one mixture
has the same element or compound, only one material
safety data sheet, or one listing, of the element or
compound is necessary.
(B)	Submitting a material safety data sheet for, or identi-
fying on a list, the mixture itself.
(b)	Thresholds.—The Administrator may establish threshold
quantities for hazardous rhftmioalB below which no facility shall be
subject to the provisions of this section. The threshold quantities
may, in the Administrator's discretion, be based on classes of chemi-
cals or categories of facilities.
(c)	Availability of MSDS on Request.—
(1)	To local emergency flanning committee.—If an owner
or operator of a facility submits a list of chemicals under
subsection (aXl), the owner or operator, upon request by the
local emergency planning committee, shall submit the material
safety data sheet for any chemical on the list to such committee.
(2)	To public.—A local emergency planning committee, upon
request by any person, shall make available a material safety
data sheet to the person in accordance with section 824. If the
local emergency planning committee does not have the re-
quested material safety data sheet, the committee shall request
the sheet from the facility owner or operator and then make the
sheet available to the person in accordance with section 324.
(d)	Initial Submission and Updating.—(1) The initial material
safety data sheet or list required under this section with respect to a
hazardous chemical shall be provided before the later of—
(A)	12 months after the date of the enactment of this title, or
(B)	3 months after the owner or operator of a facility is
required to prepare or have available a material safety data
sheet for the chemical under the Occupational Safety and
Health Act of 1970 and regulations promulgated under that Act
(2) Within 3 months following discovery by an owner or operator
of significant new information concerning an aspect of a hazardous
chemical for which a material safety data sheet was previously
submitted to the local emergency planning committee under subsec-
tion (a), a revised sheet shall be provided to such person.
(e)	Hazardous Chemical Defined.—For purposes of this section,
the term "hazardous chemical" has the m^aningr given such term by
section 1910.1200(c) of title 29 of the Code of Federal Regulations,
except that such term does not include the following;
(1) Any food, food additive, color additive, drug, or cosmetic
regulated by the Food and Drug Administration.

-------
H.R. 2005—126
(2)	Any substance present as a solid in any manufactured
item to the extent exposure to the substance does not occur
under normal conditions of use.
(3)	Any substance to the extent it is used for personal, family,
or household purposes, or is present in the same form and
concentration as a product packaged for distribution and use by
the general public.
(4)	Any substance to the extent it is used in a research
laboratory or a hospital or other medical facility under the
direct supervision of a technically qualified individual
(5)	Any substance to the extent it is used in routine agricul-
tural operations or is a fertilizer held for sale by a retailer to
the ultimate customer.
SEC 312. EMERGENCY AND HAZARDOUS CHEMICAL INVENTORY FORMS.
(a)	Basic Requirement.—(1) The owner or operator of any facility
which is required to prepare or have available a material safety data
sheet for a hazardous chemical under the Occupational Safety and
Health Act of 1970 and regulations promulgated under that Act
shall prepare and submit an emergency and hazardous chemical
inventory, form (hereafter in this title referred to as an "inventory
form") to each of the following:
(A) The appropriate local emergency planning committee.
(6)	The State emergency response commission.
(C) The fire department with jurisdiction over the facility.
(2)	The inventory form containing tier I information (as described
in subsection (dXl)) shall be submitted on or before March 1, 1988,
and annually thereafter on March 1, and shall contain .data with
respect to the preceding calendar year. The preceding sentence does
not apply if an owner or operator provides, by the same deadline
and with respect to the same wlB"^ar year, tier II information (as
described in subsection (dX2)) to the recipients described in para-
graph (1).
(3)	An owner or operator may meet the requirements of this
section with respect to a hazardous chemical which is a mixture by
doing one of the following:
(A)	Providing information on the inventory form on each
element or compound in the mixture which is a hazardous
chemicaL If more than one mixture has the same element or
compound, only one listing on the inventory form for the ele-
ment or compound at the facility is necessary.
(B)	Providing information on the inventory form on the mix-
ture itself.
(b)	Thresholds.—The Administrator may establish threshold
quantities for hazardous chemicals covered by this section below
which no facility shall be subject to the provisions of this section.'
The threshold quantities may, in the Administrator's discretion, be
based on classes of chemicals or categories of facilities.
(c)	Hazardous Chemicals Covered.—A hazardous chemical sub-
ject to the requirements of this section is/any hazardous chemical
for which a material safety data sheet or a listing is required under
section 311.
(d)	Contents of Form.—
(1) Tier i information.—
(A) Aggregate information by category.—An inven-
tory form shall provide the information described in
subparagraph (B) in aggregate terms for hazardous chemi-

-------
H.R.2005—127
cals in categories of health and physical hazards as set forth
under the Occupational Safety and Health Act of 1970 and
regulations promulgated under that Act
(6) Required information.—The information referred to
in subparagraph (A) is the following:
(i)	An estimate (in ranges) of the maximum amount
of hazardous chemicals in each category present at the
facility at any time during the preceding calendar year.
(ii)	An estimate (in ranges) of the average daily
amount of hazardous chemicals in each category
present at the facility during the preceding calendar
year.
(iii)	The general location of hazardous chemicals in
each category.
(O Modifications.—For purposes of reporting informa-
tion under this paragraph, the Administrator may—
(i)	modify the categories of health and physical haz-
ards as set forth under the Occupational Safety and
Health Act of 1970 and regulations promulgated under
that Act by requiring information to be reported in
terms of groups of hazardous chemicals which present
similar hazards in an emergency, or
(ii)	require reporting on individual hazardous
chemicals of special concern to emergency response
personnel.
(2) Tier n information.—An inventory form shall provide the
following additional information for each hazardous chemical
present at the facility, but only upon request and in accordance
with subsection (e):
(A)	The chemical name or the common name of the
chemical as provided on the material safety data sheet.
(B)	An estimate (in ranges) of the maximum amount of
the hazardous chemical present at the facility at any time
during the preceding calendar year.
(O An estimate (in ranges) of the average daily amount of
the hazardous chemical present at the facility during the
preceding calendar year.
(D)	A brief description of the manner of storage of the
hazardous chemical.
(E)	The location at the facility of the hazardous chemical.
(F)	An indication of whether the owner elects to withhold
location information of a specific hazardous chemical from
disclosure to the public under section 324.
(e) Availability of Tier II Information.—
(1)	AvAn.AiiTT.rrv TO STATE COMMISSIONS, LOCAL COMMITTEES,
and fire departments.—Upon request by a State emergency
planning commission, a local emergency planning committee, or
a fire department with jurisdiction over the facility, the owner
or operator of a facility-shall provide tier II information, as
described in subsection (d), to the person making the request.
Any such request shall be with respect to a specific facility.
(2)	Availability to other state and local officials.—A
State or local official acting in his or her official capacity may
have access to tier II information by submitting a request to the
State emergency response commission or the local emergency
planning committee. Upon receipt of a request for tier H
information, the State commission or local committee shall,

-------
H.R. 2005—128
pursuant to paragraph (1), request the facility owner or opera-
tor for the tier II information and make available such informa-
tion to the official.
(3) AVAn.ABn.TTY TO PUBLIC.—
(A)	In general.—Any person may request a State emer-
gency response commission or local emergency planning
committee for tier II information relating to the preceding
calendar year with respect to a facility. Any such request
shall be in writing and shall be with respect to a specific
facility.
(B)	Automatic provision of information to pubuc.—
Any tier II information which a State emergency response
commission or local emergency planning committee has in
its possession shall be made available to a person making a
request under this paragraph in accordance with section
324. If the State emergency response commission or local
emergency planning committee does not have the tier II
information in its possession, upon a request for tier II
information the State emergency response commission or
local emergency planning committee shall, pursuant to
paragraph (1), request the facility owner or operator for tier
II information with respect to a hazardous chemical which
a facility has stored in an amount in excess of 10,000
pounds present at the facility at any time during the
preceding calendar year and make such information avail-
able in accordance with section 324 to the person making
. the request
(O Discretionary provision of information to
public.—In the case of tier II information which is not in
the possession of a State emergency response commission or
local emergency planning committee and which is with
respect to a hazardous chemical which a facility has-stored
in an amount less than 10,000 pounds present at the facility
at any time during the preceding calendar year, a request
from a person must include the general need for the
information. The State emergency response commission or
local emergency planning committee may, pursuant to
paragraph (1), request the facility owner or operator for the
tier Q information on behalf of the person making the
request. Upon receipt of any information requested on
behalf of such person, the State emergency response
commission or local emergency planning committee shall
make the information available in accordance with section
324 to the person.
(D) Response in 45 days.—A State emergency response
commission or local emergency planning committee shall
respond to a request for tier II information under this
paragraph no later than 45 days after the date of receipt of
the request.
vf) Fire Department Access.—Upon request to an owner or opera-
tor of a facility •which files an inventory form under this section by
the fire department with jurisdiction over the facility, the owner or
operator of the facility shall allow the fire department to conduct an
on-site inspection of the facility and shall provide to the fire depart-
ment specific location information on hazardous chemicals at the
facility.

-------
H.R. 2005—129
(g) Format of Forms.—The Administrator shall publish a uni-
form format for inventory forms within three months after the date
of the enactment of this title. If the Administrator does not publish
such forms, owners and operators of facilities subject to the require-
ments of this section shall provide the information required under
this section by letter.
SEC. 313. TOXIC CHEMICAL RELEASE FORMS.
(a)	Basic Requirement.—The owner or operator of a facility
subject to the requirements of this section shall complete a toxic
chemical release form as published under subsection (g) for each
toxic chemical listed under subsection (c) that was manufactured,
processed, or otherwise used in quantities exceeding the toxic chemi-
cal threshold quantity established by subsection (f) during the
preceding calendar year at such facility. Such form shall be submit-
ted to the Administrator and to an official or officials of the State
designated by the Governor on or before July 1, 1988, and annually
thereafter on July 1 and shall contain data reflecting releases
during the preceding calendar year.
(b)	Covered Owners and Operators of Facilities.—
(1)	In general.—(A) The requirements of this section shall
apply to owners and operators of facilities that have 10 or more
full-time employees and that are in Standard Industrial Classi-
fication Codes 20 through 39 (as in effect on July 1, 1985) and
that manufactured, processed, or otherwise used a toxic chemi-
cal listed under subsection (c) in excess of the quantity of that
toxic chemical established under, subsection (f) during the cal-
endar year for which a release form is required under this
section.
(6) The Administrator may add or delete Standard Industrial
Classification Codes for purposes of subparagraph (A), but Only
to the extent necessary to provide that each Standard Industrial
Code to which this section applies is relevant to the purposes of
this section.
(C) For purposes of this section—
(i)	The term "manufacture" means to produce, prepare,
import, or compound a toxic chemical.
(ii)	The term "process" means the preparation of a toxic
chemical, after its manufacture, for distribution in
commerce—
(I) in the same form or physical state as, or in a
different form or physical state from, that in which it
was received by the person so preparing such chemical,
or
(ID as part of an article containing the toxic chemical.
(2)	Discretionary application to additional facilities.—
The Administrator, on his own motion or at the request of a
Governor of a State (with regard to facilities located in that
State), may apply the requirements of this section to the owners
and operators of any particular facility that manufactures,
processes, or otherwise uses a toxic chemical listed under
subsection (c) if the Administrator determines that such action
is warranted on the basis of toxicity of the toxic chemical,
proximity to other facilities that release the toxic chemical or to
population centers, the history of releases of such chemical at

-------
H.R. 2005—130
such facility, or such other factors as the Administrator deems
appropriate.
(c) Toxic Chemicals Covered.—'The toxic chemicals subject to the
requirements of this section are those chpmir*»la on the list in
Committee Print Number 99-169 of the Senate Committee on
Environment and Public Works, titled "Toxic Chemicals Subject to
Section 313 of the Emergency Planning and Community Right-To-
Know Act of 1986" (including any revised version of the list as may
be made pursuant to subsection (d) or (e)).
id) Revisions by Administrator.—
(1)	In general.—The Administrator may by rule add or
delete a chemical from the list described in subsection 
-------
H.R. 2005—131
(1)	In general.—Any person may petition the Administrator
to add or delete a chemical from the list described in subsection
(c) on the basis of the criteria in subparagraph (A) or (B) of
subsection (dX2). Within 180 days after receipt of a petition, the
Administrator shall take one of the following actions:
(A)	Initiate a rulemaking to add or delete the chemical to
the list, in accordance .with subsection (dX2) or (d)(3).
(B)	Publish an explanation of why the petition is denied.
(2)	Governor petitions.—A State Governor may petition the
Administrator to add or delete a chemical from the list de-
scribed in subsection (c) on the basis of the criteria in subpara-
graph (A), (6), or (C) of subsection (d)(2). In the case of such a
petition from a State Governor to delete a chemical, the petition
shall be treated in the same manner as a petition received
under paragraph (1) to delete a chemical. In the case of such a
petition from a State Governor to add a chemical, the chemical
will be added to the list within 180 days after receipt of the
petition, unleas the Administrator—
(A)	initiates a rulemaking to add the chemical to the list,
in accordance with subsection (d)(2), or
(B)	publishes an explanation of why the Administrator
believes the petition does not meet the requirements of
subsection (dX2) for adding a chemical to the list.
(f)	Threshold for Reporting.—
(1)	Toxic chemical threshold amount.—The' threshold
amounts for purposes of reporting toxic chemicals under this
section are as follows:
(A)	With respect to a toxic chemical used at a facility,
10,000 pounds of the toxic chemical per year.
(B)	With respect to a toxic chemical manufactured or
processed at a facility—
(i)	For the toxic chemical release form required to be
submitted under this section on or before July 1, 1988,
75,000 pounds of the toxic chemical per year.
(ii)	For the form required to be submitted on or
before July 1,1989, 50,000 pounds of the toxic chemical
per year.
(iii)	For the form required to be submitted on or
before July 1,1990, and for each form thereafter, 25,000
pounds of the toxic chemical per year.
(2)	Revisions.—The Administrator may establish a threshold
amount for a toxic chemical different from the amount estab-
lished by paragraph (1). Such revised threshold shall obtain
reporting on a substantial majority of total releases of the
chemical at all facilities subject to the requirements of this
section. The amounts established under this paragraph may, at
the Administrator's discretion, be based on classes of chemicals
or categories of facilities.
(g)	Form.—
(1) Information required.—Not later than June 1, 1987, the
Administrator shall publish a uniform toxic chemical release
form for facilities covered by this section. If the Administrator
does not publish such a form, owners and operators of facilities
subject to the requirements of this section shall provide the
information required under this subsection by letter post-
marked on or before the date on which the form is due. Such
form shall—
-------
H.R. 2005—132
(A)	provide for the name and location of, and principal
business activities at, the facility,
(B)	include an appropriate certification, signed by a
senior official with management responsibility for the
person or persons completing the report, regarding the
accuracy and completeness of the report; and
(C)	provide for submission of each of the following items
of information for each listed toxic chemical known to be
present at the facility:
(i)	Whether the toxic chemical at the facility is manu-
factured, processed, or otherwise used, and the general
category or categories of use of the chemical.
(ii)	An estimate of the maximum amounts (in ranges)
of the toxic chemical present at the facility at any time
during the preceding calendar year.
(iii)	For each wastestream, the waste treatment or
disposal methods employed, and an estimate of the
treatment efficiency typically achieved by such meth-
ods for that wastestream.
(iv)	The annual quantity of the toxic chemical enter-
ing each environmental medium.
(2) Use of available data.—In order to provide the informa-
tion required under this section, the owner or operator of a
facility may use readily available data (including monitoring
data) collected pursuant to other provisions of law, or, where
such data are not readily available, reasonable estimates of the
amounts involved. Nothing in this section requires the monitor-
ing or measurement of the quantities, concentration, or fre-
quency of any toxic chemical released into the environment
beyond that monitoring and measurement required under other
provisions of law or regulation. In order to assure consistency,
the Administrator shall require that data be expressed in
common units.
(h)	Use of Release Form.—The release forms required under this
section are intended to provide information to the Federal, State,
and local governments and the public, including citizens of commu-
nities surrounding covered facilities. The release form shall be
available, consistent with section 324(a), to inform persons about
releases of toxic chemicals to the environment; to assist govern-
mental agencies, researchers, and other persons in the conduct of
research and data gathering; to aid in the development of appro-
priate regulations, guidelines, and standards; and for other similar
purposes.
(i)	Modifications in Reporting Frequency.—
(1)	In general.—The Administrator may modify the fre-
quency of submitting a report under this section, but the
Administrator may not modify the frequency to be any more
often than annually A modification may apply, either nation-
ally or in a specific geographic area, to the following;
(A)	All toxic chemical release forms required under this
section.
(B)	A class of toxic chemicals or a category of facilities.
(Q A specific toxic chemical.
(D)	A specific facility.
(2)	Requirements.—A modification may be made under para-
graph (1) only if the Administrator—
-------
H.R. 2005—133
(A) makes a finding that the modification is consistent
with the provisions of subsection (h), based on-
to experience from previously submitted toxic chemi-
cal release forms, and
(ii) determinations made under paragraph (3), and
(6) the finding is made by a rulemaking in accordance
with section 553 of title 5, United States Code.
(3)	Determinations.—The Administrator shall make the fol-
lowing determinations with respect to a proposed modification
before making a modification under paragraph (1):
(A) The extent to which information relating to the pro-
posed modification provided on the toxic chemical release
forms has been used by the Administrator or other agencies
of the Federal Government, States, local governments,
health professionals, and the public.
3) The extent to which the information is (i) readily
available to potential users from other sources, such as
State reporting programs, and (ii) provided to the Adminis-
trator under another Federal law or through a State
program.
(C) The extent to which the modification would impose
additional and unreasonable burdens on facilities subject to
the reporting requirements under this section.
(4)	5-year review.—Any modification made under this subsec-
tion shall be reviewed at least once every 5 years. Such review
shall examine the modification and ensure that the require-
ments of paragraphs (2) and (3) still justify continuation of the
modification. Any change to a modification reviewed under this
paragraph shall be made in accordance with this subsection.
(5)	Notification to congress.—The Administrator shall
notify Congress of an intention to initiate a rulemaking for a
modification under this subsection. After such notification, the
Administrator shall delay initiation of the rulemaking for at
least 12 months, but no more than 24 months, after the date of
such notification.
(6)	Judicial review.—In any judicial review of a rulemaking
which establishes a modification under this subsection, a court
may hold unlawful and set aside agency action, findings, and
conclusions found to be unsupported by substantial evidence.
(7)	Applicability.—A modification under this subsection may
apply to a calendar year or other reporting period beginning no
earlier than January 1,1993.
(8)	Effective date.—Any modification made on or after Janu-
ary 1 and before December 1 of any calendar year shall take
effect beginning with the next calendar year. Any modification
made on or after December 1 of any calendar year and before
January 1 of the next calendar year shall take effect beginning
with the calendar year following such next calendar year.
(j) EPA Management of Data.—The Administrator shall estab-
lish and maintain in a computer data base a national toxic chemical
inventory based on data submitted to the Administrator under this
section. The Administrator shall make these data accessible by
computer telecommunication and other means to any person on a
cost reimbursable basis.
(k) Report.—Not later than June 30, 1991, the Comptroller Gen-
eral, in consultation with the Administrator and appropriate offi-
-------
H. R. 2005—134
rials in the States, shall submit to the Congress a report including
each of the following:
(1)	A description of the steps taken by the Administrator and
the States to implement the requirements of this section, includ-
ing steps taken to make information collected under this section
available to and accessible by the public.
(2)	A description of the extent to which the information
collected under this section has been used by the Environmental
Protection Agency, other Federal agencies, the States, and the
public, and the purposes for which the information has been
used.
(3)	An identification and evaluation of options for modifica-
tions to the requirements of this section for the purpose of
making information collected under this section more useful.
(1) Mass Balance Study.—
(1)	In general.—The Administrator shall arrange for a ™«gs
balance study to be carried out by the National Academy of
Sciences using mass balance information collected by the
Administrator under paragraph (3). The Administrator shall
submit to Congress a report on such study no later than 5 years
after the date of the enactment of this title.
(2)	Purposes.—The purposes of the study are as follows:
(A)	To assess the value of mass balance analysis in deter-
mining the accuracy of information on toxic chemical
releases.
(B)	To .assess the value of obtaining mass balance
information, or portions thereof, to determine the waste
reduction efficiency of different facilities, or categories of
facilities, including the effectiveness of toxic chemical regu-
lations promulgated under laws other than this title.
(C)	To assess the utility of such information for evaluat-
ing toxic chemical management practices at facilities, or
categories of facilities, covered by this section.
(D)	To determine the implications of mass balance
information collection on a national scale .similar to the
mass balance information collection carried out by the
Administrator under paragraph (3), including implications
of the use of such collection as part of a national annua)
quantity toxic chemical release program.
(3)	Information collection.—(A) The Administrator shall
acquire available mass balance information from States which
currently conduct (or during the 5 years after the date of
enactment of this title initiate) a mass balance-oriented annual
quantity toxic chemical release program. If information from
such States provides an inadequate representation of industry
classes and categories to carry out the purposes of the study, the
Administrator also may acquire mass balance information nec-
essary for the study from a representative number of facilities
in other States.
(B) Any information acquired under this section shall be
available to the public, except that upon a showing satisfactory
to the Administrator by any person that the information (or a
particular part thereof) to which the Administrator or any
officer, employee, or representative has access under this sec-
tion if made public would divulge information entitled to protec-
tion under section 1905 of title 18, United States Code, such
information or part shall be considered confidential in accord-
-------
H.R. 2005—135
ance with the purposes of that section, except that such
information or part may be disclosed to other officers, employ*
ees, or authorized representatives of the United States concerned
with carrying out this section.
(C)	The Administrator may promulgate regulations prescrib-
ing procedures for collecting mass	information under
tht« paragraph.
(D)	For purposes of collecting mass halnnw* information under
subparagraph (A), the Administrator may require the submis-
sion of information by a State or facility.
(4) Mass balance definition.—For purposes of this subsec-
tion, the term "mass balance" means an accumulation of the
annual quantities of chemicals transported to a facility, pro-
duced at a facility, consumed at a facility, used at a facility,
accumulated at a facility, released from a facility, and trans-
ported from a facility as a waste or as a commercial product or
byproduct or component of a commercial product or byproduct.
Subtitle C—General Provisions
SEC. 321. RELATIONSHIP TO OTHER LAW.
. (a) In Genebal.—Nothing in this title shall—
(1)	preempt any State or local law,
(2)	except as provided in subsection (b), otherwise affect any
State or local law or the authority of any State or local govern-
ment to adopt or enforce any State or local law, or
(3)	affect or modify in any way the obligations or liabilities of
any person under other Federal law.
(b) Effect on MSDS Requirements.—Any State or local law
enacted after August 1, 1985, which requires the submission of a
material safety data sheet from facility owners or operators shall
require that the data sheet be identical in content and format to the
data sheet required under subsection (a) of section 311. In addition, a
State or locality may require the submission of information which is
supplemental to the information required on the data sheet (includ-
ing information on the location and quantity of hazardous chernirftls
present at the facility), through additional sheets attached to the
data sheet or such other means as the State or locality considers
appropriate.
SEC 322. TRADE SECRETS.
(a) Authority To Withhold Information.—
(1)	Genebal authority.—(A) With regard to a hazardous
chemical, an extremely hazardous substance, or a toxic chemi-
cal, any person required under section 303(dX2), 303(dXS), 311,
312, or 313 to submit information to any other person may
withhold from such submittal the specific chemical identity
(including the chemical name and other specific identification),
as defined in regulations prescribed by the Administrator undo*
subsection (c), if the person complies with paragraph (2).
(B) Any person withholding the specific chemical identity
shall, in the place on the submittal where the chemical identity
would normally be included, include the generic class or cat-
egory of the hazardous chemical, extremely hazardous sub-
stance, or toxic chemical (as the case may be).
(2)	Requirements.—(A) A person is entitled to withhold
information under paragraph (1) if such person—
-------
H.R. 2005—136
(i)	claims that such information is a trade secret, on the
basis of the factors enumerated in subsection (b),
(ii)	includes in the submittal referred to in paragraph (1)
an explanation of the reasons why such information is
claimed to be a trade secret, based on the factors enumer-
ated in subsection (b), including a specific description of
why such factors apply, and
(iii)	submits to the Administrator a copy of such submit-
- tal, and the information withheld from such submittal.
(B) In submitting to the Administrator the information re-
quired by subparagraph (AXiii), a person withholding informa-
tion under this subsection may—
(i)	designate, in writing and in such manner as the
Administrator may prescribe by regulation, the informa-
tion which such person believes is entitled to be withheld
under paragraph (1), and
(ii)	submit such designated information separately from
other information submitted under this subsection.
(3) Limitation.—The authority under this subsection to with-
hold information shall not apply to information which the
Administrator has determined, in accordance with subsection
(c), is not a trade secret.
(b)	Trade Secret Factors.—No person reauired to provide
information under this title may claim that the information is
entitled to protection as a trade secret under subsection (a) unless
such person shows-each of the following:
(1)	Such person has not disclosed the information to any other
person, other than a member of a local emergency planning
committee, an officer or employee of the United states or a
State or local government, an employee of such person, or a
person who is bound by a confidentiality agreement, and such
person has taken reasonable measures to protect the confiden-
tiality of such information and intends to continue to take such
measures.
(2)	The information is not required to be disclosed, or other-
wise made available, to the public under any other Federal or
State law.
(3)	Disclosure of the information is likely to cause substantial
harm to the competitive position of such person.
(4)	The chemical identity is not readily discoverable through
reverse engineering.
(c)	Trade Secret Regulations.—As soon as practicable after the
date of enactment of this title, the Administrator shall prescribe
regulations to implement this section. With respect to subsection
(bX4), such regulations shall be equivalent to comparable provisions
in the Occupational Safety and Health Administration Hazard
Communication Standard (29 C.F.R. 1910.1200) and any revisions of
such standard prescribed by the Secretary of Labor in accordance
with the final ruling of the courts of the United States in United
Steelworkers of America, AFL-CIO-CLC v. Thorne G. Auchter.
(d)	Petition for Review.—
(1) In general.—Any person may petition the Administrator
for the disclosure of the specific chemical identity of a hazard-
ous chemical, an extremely hazardous substance, or a toxic
chemical which is claimed as a trade secret under this section.
The Administrator may, in the absence of a petition under this
paragraph, initiate a determination, to be carried out in accord-
-------
H.R. 2005—137
asce with this subsection, as to whether information withheld
constitutes a trade secret
(2)	Initial review.—Within 80 days after the date of receipt
of a petition under paragraph (1) (or upon the Administrator's
initiative), the Administrator shall review the explanation filed
by a trade secret claimant under subsection (aX2) and determine
whether the explanation presents assertions which, if true, are
sufficient to support ai finning that the specific chemical identity
is a trade secret.
(3)	Finding or sufficient assertions.—
(A)	If the Administrator determines pursuant to pva-
graph (2) that the explanation presents sufficient assertions
to support a finding that the specific chemical identity is a
trade secret, the Administrator shall notify the trade secret
claimant that he has 30 days to supplement the explanation
. with detailed information to support the assertions.
(B)	If the Administrator determines, after receipt of any
supplemental supporting detailed information under
subparagraph (A), that tne assertions in the explanation
are true and that the specific chemical identity is a trade
secret, the Administrator shall bo notify the petitioner and
the petitioner may seek judicial review of the
determination.
(O If the Administrator determines, after receipt of any
supplemental supporting detailed information under
subparagraph (A), that the assertions in the explanation
are not true and that the specific chemical identity is not a
trade secret, the Administrator shall notify the trade secret
claimant that the Administrator intends to release the
specific chemical identity. The trade secret claimant has 30
days in which he may appeal the Administrator's deter-
mination under this subparagraph to the Administrator. If
the Administrator does not reverse his determination under
this subparagraph in such an appeal by the trade secret
claimant, the trade secret claimaint may seek judicial
review of the determination.
(4)	Finding of insufficient assertions.—
(A) If the Administrator determines pursuant to para-
graph (2) that the explanation presents insufficient asser-
tions to support a finding that the specific chemical identity
is a trade secret, the Administrator shall notify the trade
secret claimant that he has 30 days to appeal the deter-
mination to the Administrator, or, upon a showing of good
cause, amend the original explanation by providing supple-
mentary assertions to support the trade secret claim.
(6) If the Administrator does not reverse his determina-
tion under subparagraph (A) after an appeal or an examina-
tion of any supplementary assertions under subparagraph
(A), the Aaministrator shall so notify the trade secret claim-
ant and the trade secret claimant may seek judicial review
of the determination.
(O If the Administrator reverses his determination under
subparagraph (A) after an appeal or an examination of any
supplementary assertions under subparagraph (A), the
procedures under paragraph (3) of this subsection apply,
(e) Exception for Information Provided to Health Profes-
sionals.—Nothing in this section, or regulations adopted pursuant
-------
H. Rr 2005—138
to this section, shall authorize any person to withhold information
which is required to be provided to a health professional, a doctor, or
a nurse in accordance with section 323.
(f)	Providing Information to the Administrator; Availability
to Public.—Any information submitted to the Administrator under
subsection (aX2) or subsection (dX3) (except a specific chemical iden-
tity) shall be available to the public, except that upon a showing
satisfactory to the Administrator by any person that the informa-
tion (or a particular part thereof) to which the Administrator has
access under this section if made public would divulge information
entitled to protection under section 1905 of title 18, United States
Code, such information or part shall be considered confidential in
accordance with the purposes of that section, except that such
information or part may be disclosed to other officers, employees, or
authorized representatives of the United States concerned with
carrying out this title.
(g)	Information Provided to State.—Upon request by a State,
acting through the Governor of the State, the Administrator shall
provide to the State any information obtained under subsection
(aX2) and subsection (dX3).
(h)	Information on Adverse Effects.—(1) In any case in which
the identity of a hazardous chemical or an extremely hazardous
substance is claimed as a trade secret, the Governor or State
emergency response commission established under section 301 shall
identify the adverse health effects associated with the hazardous
chemical or extremely hazardous substance and shall assure that
such information is provided to any person requesting information
about such hazardous chemical or extremely hazardous substance.
(2) In any case in which the identity of a toxic chemical is claimed
as a trade secret, the Administrator shall identify the adverse
health and environmental effects associated with the toxic chemical
and shall assure that such information is included in the computer
database required by section 3130') &&d is provided to any person
requesting information about such toxic chemical.
(i)	Information Provided to Congress.—Notwithstanding any
limitatio contained in this section or any other provision of law, all
information reported to or otherwise obtained by the Administrator
(or any representative of the Administrator) under this title shall be
made available to a duly authorized committee of the Congress upon
written request by such a committee.
SEC 323. PROVISION OF INFORMATION TO HEALTH PROFESSIONALS.
DOCTORS. AND NURSES.
(a) Diagnosis or Treatment by Health Professional.—An
owner or operator of a facility which is subject to the requirements
of section 311, 312, or 313 shall provide the specific chemical iden-
tity, if known, of a hazardous chemical, extremely hazardous sub-
stance, or a toxic chemical to any health professional who requests
such information in writing if the health professional provides a
written statement of need under this subsection and a written
confidentiality agreement under subsection (d). The written state-
ment of need shall be a statement that the health professional has a
reasonable basis to suspect that—
(1)	the information is needed for purposes of diagnosis or
treatment of an individual,
(2)	the individual or individuals being diagnosed or treated
have been exposed to the chemical concerned, and
-------
H.R. 2005—139
(3) knowledge of the specific chemical identity of such chemi-
cal will assist in diagnosis or treatment.
Following such a written request, the owner or operator to whom
such request is made shall promptly provide the requested informa-
tion to the health professional: The authority to withhold the spe-
cific chemical identity of a chemical under section 322 when such
information is a trade secret shall not apply to information required
to be provided under this subsection, subject to the provisions of
subsection (d).
(b)	Medical Emergency.—An owner or operator of a facility
which is subject to the requirements of section 311, 312, or 313 shall
provide a copy of a material safety data sheet, an inventory form, or
a toxic chemical release form, including the specific chemical iden-
tity, if known, of a hazardous chemical, extremely hazardous sub-
stance, or a toxic chemical, to any treating physician or nurse who
requests such information if such physician or nurse determines
that—
(1)	a medical emergency exists,
(2)	the specific chemical identity of the chemical concerned is
necessary for or will assist in emergency or first-aid diagnosis or
treatment, and
(3)	the individual or individuals being diagnosed or treated
have been exposed to the chemical concerned.
Immediately following such a request, the owner or operator to
whom such request is made shall provide the requested information
to the physician or nurse. The authority to withhold the specific
identity of a ffhomimi from a material safety data sheet,
an inventory form, or a toxic chemical release form under section
322 when such information is a trade secret shall not apply to
information required to be provided to a treating physician or nurse
under this subsection. No written confidentiality agreement or
statement of need shall be required as a precondition of such
disclosure, but the owner or operator disclosing such information
may require a written confidentiality agreement in accordance with
subsection (d) and a statement setting forth the items listed in
paragraphs (1) through (3) as soon as circumstances permit.
(c)	Preventive Measures by Local Health Professionals.—
(1) Provision of information.—An owner or operator of a
facility subject to the requirements of section 311, 312, or 313
shall provide the specific chemical identity, if known, of a
hazardous ftigmiwni, an extremely hazardous substance, or a
toxic chemical to any health professional (such as a physician,
toxicologist, or epidemiologist)-—
(A)	who is a local government employee or a person under
contract with the local government, and
(B)	who requests such information in writing and pro-
vides a written statement of need under paragraph (2) and a
written confidentiality agreement under subsection (d).
Following such a written request, the owner or operator to
whom such request is made shall promptly provide-the re-
quested information to the local health professional. The
authority to withhold the specific chemical identity of a chemi
cal under section 322 when such information is a trade secret
shall not apply to information required to be provided under
this subsection, subject to the provisions of subsection (d).
-------
H.R. 2005—140
(2) Written statement of need.—The written statement of
need shall be a statement that describes with reasonable detail
one or more of the following health needs for the information:
(A)	To assess exposure of persons living in a local commu-
nity to the hazards of the chemical concerned.
(B)	To conduct or assess sampling to determine exposure
levels of various population groups.
(O To conduct periodic medical surveillance of exposed
population groups.
(.D) To provide medical treatment to exposed individuals
or population groups.
(E)	To conduct studies to determine the health effects of
exposure.
(F)	To conduct studies to aid in the identification of a
chemical that may reasonably be anticipated to cause an
observed health effect.
(d)	Confidentiality Agreement.—-Any person obtaining informa-
tion under subsection (a) or (c) shall, in accordance with such
subsection (a) or (c), be required to agree in a written confidentiality
agreement that he will not use the information for any purpose
other than the health needs asserted in the statement of need,
except as may otherwise be authorized by the terms of the agree-
ment or by the person providing sufch information. Nothing in this
subsection shall preclude the parties to a confidentiality agreement
from pursuing any remedies to the extent permitted by law.
(e)	Regulations.—As soon as practicable after the date of the
enactment of this title, the Administrator shall promulgate regula-
tions describing criteria and parameters for the statement of need
under subsection (a) and (c) and the confidentiality agreement under
subsection (d).
SEC 324. PUBLIC AVAILABILITY OF PLANS, DATA SHEETS. FORMS, AND
FOLLOWUP NOTICES.
(a)	Availability to Public.—Each emergency response plan,
material safety data sheet, list described in section 311(aX2), inven-
tory form, toxic chemical release form, and followup emergency
notice shall be made available to the general public, consistent with
section 322, during normal working hours at the location or loca-
tions designated by the Administrator, Governor, State emergency
response commission, or local emergency planning committee, as
appropriate. Upon request by an owner or operator of a facility
subject to the requirements of section 312, the State emergency
response commission and the appropriate local emergency planning
committee shall withhold from disclosure under this section the
location of any specific chemical required by section 312(d)(2) to be
contained in an inventory form as tier II information.
(b)	Notice of Public Availability.—Each local emergency plan-
ning committee «h»n annually publish a notice in local newspapers
that the emergency response plan, material safety data sheets, and
inventory forms have been submitted under this section. The notice
ghall state that followup emergency notices may subsequently be
issued. Such notice shall announce that members of the public who
wish to review any such plan, sheet, form, or followup notice may do
so at the location designated under subsection (a).
-------
RR. 2005—141
SEC. 325. ENFORCEMENT.
(a)	Civil Penalties tor Emergency Planning.—The Adminis-
trator may order a facility owner or operator (except an owner or
operator of a facility designated under section 302(bX2)) to comply
with section 302(c) and section 303(d). The United States district
court for the district in which the facility is located shall have
jurisdiction to enforce the order, and any person who violates or
fails to obey such an order shall be liable to the United States for a
civil penalty of not more than $25,000 for each day in which such
violation occurs or such failure to comply continues.
(b)	Civil, Administrative, and Criminal Penalties for Emer-
gency NOTIFI CATION.—
(1)	Class i administrative penalty.—(A) A civil penalty of
not more than $25,000 per violation may be assessed by the
Administrator in the case of a violation of the requirements of
section 304.
(B)	No civil penalty may be assessed under this subsection
unless the person accused of the violation is given notice and
opportunity for a hearing with respect to the violation.
(C)	In determining the amount of any penalty assessed pursu-
ant to this subsection, the Administrator shall take into account
the nature, circumstances, extent and gravity of the violation or
violations and, with respect to the violator, ability to pay, any
prior history of such violations, the degree of culpability, eco-
nomic benefit or savings (if any) resulting from the violation,
and such other matters as justice may require.
(2)	Class n administrative penalty.—A civil penalty of not
more than $25,000 per day for each day during which the
violation continues may be assessed by the Administrator in the
case of a violation of the requirements of-section 304. In the case
of a second or subsequent violation the amount of such penalty
may be not more than $75,000 for each day during which the
violation continues. Any civil penalty under this subsection
shall be assessed and collected in the same manner, and subject
to the same provisions, as in the case of civil penalties assessed
and collected under section 16 of the Toxic Substances Control
Act. In any proceeding for the assessment of a civil penalty
under this subsection the Administrator may issue subpoenas
for the attendance and testimony of witnesses and the produc-
tion of relevant papers, books, and documents and may promul-
gate rules for discovery procedures.
(3)	Judicial assessment.—The Administrator may bring an
action in the United States District court for the appropriate
district to assess and collect a penalty of not more than $25,000
per day for each day during which the violation continues in the
case of a violation of the requirements of section 304. In the case
of a second or subsequent violation, the amount of such penalty
may be not more than $75,000 for each day during which the
violation continues.
(4)	Criminal penalties.—Any person who knowingly and
willfully fails to provide notice in accordance with section 304
shall, upon conviction, be fined not more than $25,000 or impris-
oned for not more than two years, or both (or in the case of a
second or subsequent conviction, shall be fined not more than
$50,000 or imprisoned for not more than five years, or both).
-------
H.R. 2005—142
(c)	Civil and Adndnisteatcve Penalties toe Reporting Require-
ments.—(1) Any person (other than a governmental entity) who
violates any requirement of section 312 or 313 shall be liable to the
United States for a civil penalty in an amount not to exceed $25,000
for each such violation.
(2)	Any person (other than a governmental entity) who violates
any requirement of section 311 or 323(b), and any person who fails to
furnish to the Administrator information required under section
322(a)(2) shall be liable to the United States for a civil penalty in an
amount not to exceed $10,000 for each such violation.
(3)	Each day a violation described in paragraph (1) or (2) continues
shall, for purposes of this subsection, constitute a separate violation.
(4)	The Administrator may assess any civil penalty for which a
person is liable under this subsection by administrative order or
may bring an action to assess and collect the penalty in the United
States district court for the district in which the person from whom
the penalty is sought resides or in which such person's principal
place of business is located.
(d)	Civil, Administrative, and Criminal Penalties With
Respect to Trade Secrets.—
(1)	Civil and administrative penalty for frivolous
claims.—If the Administrator determines—
(AXi) under section 322(dX4) that an explanation submit-
ted by a trade secret claimant presents insufficient asser-
tions to support a finding that a specific chemical identity is
a trade secret, or (ii) after receiving supplemental support-
ing detailed information under section 322(dX3XA), that the -
specific chemical identity is not a trade secret; and
(B) that the trade secret claim is frivolous,
the trade secret claimant is liable for a penalty of $25,000 per
claim. The Administrator may assess the penalty by administra-
tive order or may bring an action in the appropriate district
court of the United States to assess and collect the penalty.
(2)	Criminal penalty for disclosure of trade secret
information.—Any person who knowingly and willfully di-
vulges or Hiwlnwi any information entitled to protection under
section 322 shall, upon conviction, be subject to a fine of not
more than $20,000 or to imprisonment not to exceed one year, or
both.
(e)	Special Enforcement Provisions for Section 323.—When-
ever any facility owner or operator required to provide information
under section 323 to a health professional who has requested such
information fails or refuses to provide such information in accord-
ance with such section, such health professional may bring an action
in the appropriate United States district court to require such
facility owner or operator to provide the information. Such court
shall have jurisdiction to issue such orders and take such other
action as may be necessary to enforce the requirements of section
323.
(f)	Procedures for Administrative Penalties.—
(1) Any person against whom a civil penalty is assessed under
this section may obtain review thereof in the appropriate dis-
trict court of the United States by filing a notice of appeal in
such court within 30 days after the date of such order and by
simultaneously sending a copy of such notice by certified mail to
the Administrator. Hie Administrator shall promptly file in
such court a certified copy of the record upon which such
-------
H.R. 2005—143
violation was found or such penalty imposed. If any person fails
to pay an assessment of a civil penalty after it has become a
final and unappealable order or after the appropriate court has
entered final judgment in favor of the United States, the
Administrator may request the Attorney General of the United
States to institute a civil action in an appropriate district court
of the United States to collect the penalty, and such court shall
have jurisdiction to hear and decide any such action. In hearing
such action, the court shall have authority to review the viola-
tion and the assessment of the civil penalty on the record.
(2) The Administrator may issue subpoenas for the attend-
ance and testimony of witnesses and the production of relevant
papers, books, or documents in connection with hearings under
this section. In case of contumacy or refusal to obey a subpoena
issued pursuant to this paragraph and served upon any person,
the district court of the United States for any district in which
such person is found, resides, or transacts business, upon ap-
plication by the United States and after notice to such person,
shall have jurisdiction to issue an order requiring such person
to appear and give testimony before the administrative law
judge or to appear and produce documents before the adminis-
trative law judge, or both, and any failure to obey such order of
the court may be punished by such court as a contempt thereof.
SEC. 326. CIVIL ACTIONS.
(a) Authority To Bring Civil Actions.—
(1) Citizen suits.—Except as provided in subsection (e), any
person may commence a civil action on his own behalf against
the following:
(A)	An owner or operator of a facility for failure to do any
of the following:
(i)	Submit a followup emergency notice under section
304(c).
(ii)	Submit a material safety data sheet or a list
under section 311(a).
(iii)	Complete and submit an inventory form under
section 312(a) containing tier I information as described
in section 312(dXl) unless such requirement does not
apply by reason of the second sentence of section
312(aX2).
(iv)	Complete and submit a toxic chemical release
form under section 313(a).
(B)	The Administrator for failure to do any of the
following:
(i)	Publish inventory forms under section 312(g).
(ii)	Respond to a petition to add or delete a chemical
under section 313(eXl) within 180 days after receipt of'
the petition.
(iii)	Publish a toxic chemical release form under
313(g).
(iv)	Establish a computer database in accordance
with section 313(j).
(v)	Promulgate trade secret regulations under section
322(c).
(vi)	Render a. decision in response to a petition under
section 322(d) within 9 months after receipt of the
petition.
-------
H.B. 2005—144
(O The Administrator, a State Governor, or a State
emergency response commission, for failure to provide a
mechanism for public availability of information in accord-
ance with section 324(a).
(D) A State Governor or a State emergency response
commission for failure to respond to a request for tier II
information under section 312(e)(3) within 120 days after
the date of receipt of the request.
(2) State or local suits.—
(A)	Any State or local government may commence a civil
action against an owner or operator of a facility for failure
to do any of the following;
(i)	Provide notification to the emergency response
commission in the State under section 302(c)..
(ii)	Submit a material safety data sheet or a list
under section 311(a).
(iii)	Make available information requested under sec-
tion 311(c).
(iv)	Complete and submit an inventory form under
section 312(a) containing tier I information unless such
requirement does not apply by reason of the second
sentence of section 312(aX2)..
(B)	Any State emergency response commission or local
emergency planning committee may commence a civil
action against an owner or operator of a facility for failure
to provide information under section 303(d) or for failure to
submit tier II information under section 312(eXl)-
(C)	Any State may commence a civil action against the
Administrator for failure to provide information to the
State under section 322(g).
(b)	Venue.—
(1)	Any action under subsection (a) against an owner or
operator of a facility shall be brought in the district court for
the district in which the alleged violation occurred.
(2)	Any action under subsection (a) against the Administrator
may be brought in the United States District Court for the
District of Columbia.
(c)	Relief.—The district court shall have jurisdiction in actions
brought under subsection (a) against an owner or operator of a
facility to enforce the requirement concerned and to impose any
civil penalty provided for violation of that requirement The district
court shall have jurisdiction in actions brought under subsection (a)
against the Administrator to order the Administrator to perform
the act or duty concerned.
(d)	Notice.—
(1)	No action may be commenced under subsection (aXIXA)
prior to 60 days after the plaintiff has given notice of the alleged
violation to the Administrator, the State in which the alleged
violation occurs, and the alleged violator. Notice under this
paragraph shall be given in such manner as the Administrator
shall prescribe by regulation.
(2)	No action may be commenced under subsection (aXIXB) or
(aXIXC) prior to 60 days after the date on which the plaintiff
gives notice to the Administrator, State Governor, or State
emergency response commission (as the case may be) that the
plaintiff will commence the action. Notice under this paragraph
-------
H.R. 2005—145
shall be given in such manner as the Administrator shall
prescribe by regulation.
(e)	Limitation.—No action may be commenced under subsection
(a) against an owner or operator of a facility if the Administrator
has commenced and is diligently pursuing an administrative order
or civil action to enforce the requirement concerned or to impose a
civil penalty under this Act with respect to the violation of the
requirement
(f)	Costs.—The court, in issuing any final order in any action
brought pursuant to this section, may award costs of litigation
(including reasonable attorney and expert witness fees) to the
prevailing or the substantially prevailing party whenever the court
determines such an award is appropriate. The court may, if a
temporary restraining order or preliminary injunction is sought,
require the filing of a bond or equivalent security in accordance with
the Federal Rules of Civil Procedure.
(g)	Other Rights.—Nothing in this section shall restrict or
expand any right which any person (or class of persons) may have
under any Federal or State statute or common law to seek enforce-
ment of any requirement or to seek any other relief (including relief
against the Administrator or a State agency).
(h)	Intervention.—
(1)	By the united states.—In any action under this section
the United States or the State, or both, if not a party, may
intervene as a matter of right.
(2)	By persons.—In any action under this section, any person
may intervene as a matter of right when such person has a
direct interest which is or may be adversely affected by the
action and the disposition of the action may, as a practical
matter, impair or impede the person's ability to protect that
interest unless the Administrator or the State shows that the
person's interest is adequately represented by existing parties
in the action.
SEC. 327. EXEMPTION.
Except as provided in section 304, this title does not apply to the
transportation, including the storage incident to such transpor-
tation, of any substance or chemical subject to the requirements of
this title, including the transportation and distribution of natural
gas.
SEC. 328. REGULATIONS.
The Administrator may prescribe such regulations as may be
necessary to carry out this title.
SEC 329. DEFINITIONS.
For purposes of this title—
(1)	Administrator.—The term "Administrator" means the
Administrator of the Environmental Protection Agency.
(2)	Environment.—The term "environment" includes water,
air, and land and the interrelationship which exists among and
between water, air, and land and all living things.
(3)	Extremely hazardous substance.—The term "extremely
hazardous substance" means a substance on the list described in
section 302(aX2).
(4)	Facility.—The term "facility" means all buildings, equip-
ment, structures, and other stationary items which are located
-------
H.R. 2005—146
on a single site or on contiguous or adjacent sites and which are
owned or operated by the same person (or by any person which
controls, is controlled by, or under common control with, such
person). For purposes of section 304, the term includes motor
vehicles, rolling stock, and aircraft
(5)	Hazardous chemical.—The term "hazardous chemical"
has the meaning given such term by section 311(e).
(6)	Material, safety data sheet.—The term "material safety
data sheet" means the sheet required to be developed under
section 1910.1200(g) of title 29 of. the Code of Federal Regula-
tions, as that section may be amended from time to time.
(7)	Person.—The term "person" means any individual, trust,
firm, joint stock company, corporation (including a government
corporation), partnership, association, State, municipality,
commission, political subdivision of a State, or interstate body.
(8)	Release.—The term "release" means any spilling, leaking,
pumping, pouring, emitting, emptying, discharging, injecting,
escaping, leaching, dumping, or disposing into the environment
(including the abandonment or discarding of barrels, containers,
and other closed receptacles) of any hazardous chemical, ex-
tremely hazardous substance, or toxic chemical.
(9)	State.—The term "State" means any State of the United
States, the District of Columbia, the Commonwealth of Puerto
Rico, Guam, American Samoa, the United States Virgin Islands,
the Northern Mariana Islands, and any other territory or
possession over which the United States has jurisdiction.
(10)	Toxic chemical.—The term "toxic chemical" means a
substance on the list described in section 313(c).
SEC. 330. AUTHORIZATION OF APPROPRIATIONS.
There are authorized to be appropriated for fiscal years beginning
after September 30, 1986, such sums as may be necessary to carry
out this title.
TITLE IV—RADON GAS AND INDOOR AIR QUALITY
RESEARCH
SEC. 401. SHORT TITLE.
This title may be cited as the "Radon Gas and Indoor Air Quality
Research Act of 1986".
SEC. 402. FINDINGS.
The Congress finds that:
(1)	High levels of radon gas pose a serious health threat in
structures in certain areas of the country.
(2)	Various scientific studies have suggested that exposure to
radon, including exposure to naturally occurring radon and
indoor air pollutants, poses a public health risk.
(3)	Existing Federal radon and indoor air pollutant research
programs are fragmented and underfunded.
(4)	An adequate information base concerning exposure to
radon and indoor air pollutants should be developed by the
appropriate Federal agencies.
SEC. 403. RADON GAS AND INDOOR AIR QUALITY RESEARCH PROGRAM.
(a) Design of Program.—The Administrator of the Environ
mental Protection Agency shall establish a research program with
-------
H.K. 2005—147
respect to radon gas and indoor air quality. Such program shall be
designed to—
(1)	gather data and information on all aspects of indoor air
quality in order to contribute to the understanding of health
problems associated with the existence of air pollutants in the
indoor environment;
(2)	coordinate Federal, State, local, and private research and
development efforts relating to the improvement of indoor air
quality, and
(3)	assess appropriate Federal Government actions to mitigate
the environmental and health risks associated with indoor air
quality problems.
(b)	Program Requirements.—The research program required
under this section shall include—
(1)	research and development concerning the identification,
characterization, and monitoring of the sources and levels of
indoor air pollution, including radon, which includes research
and development relating to—
(A) die measurement of various pollutant concentrations
and their strengths and sources,
(6) high-risk building types, and
(C) instruments for indoor air quality data collection;
(2)	research relating to the effects of indoor air pollution and
radon on human health;
(3)	research and development relating to control technologies
or other mitigation measures to prevent or abate indoor air
pollution (including the development, evaluation, and testing of
individual and generic control devices and systems):
(4)	demonstration of methods for reducing or eliminating
indoor air pollution and radon, including sealing, venting, and
other methods that the Administrator determines may be
effective;
(5)	research, to be carried out in conjunction with the Sec-
retary of Housing and Urban Development, for the purpose of
developing—
(A)	methods for assessing the potential for radon contami-
nation of new construction, including (but not limited to)
consideration of the moisture content of soil, porosity of
soil, and radon content of soil; and
(B)	design measures to avoid indoor air pollution; and
(6)	the dissemination of information to assure the public
availability of the findings of the activities under this section.
(c)	Advisory Committees.—The Administrator shall establish a
committee comprised of individuals representing Federal agencies
concerned with various aspects of indoor air quality and an advisory
group comprised of individuals representing the States, die sci-
entific community, industry, and public interest organizations to
assist him in carrying out the research program for radon gas and
indoor air quality.
(d)	Implementation Plan.—Not later than 90 days after the
enactment of this Act, the Administrator shall submit to the Con-
gress a plan for implementation of the research program under this
section. Such plan shall also be submitted to the EPA Science
Advisory Board, which shall, within a reasonable period of time,
submit its comments on such plan to Congress.
(e)	Report.—Not later than 2 years after the enactment of this
Act, the Administrator shall submit to Congress a report respecting
-------
H.R. 2005—148
his activities under this section and making such recommendations
as appropriate.
SEC 404. CONSTRUCTION OFTTfLE.
Nothing in this title shall be construed to authorize the Adminis-
trator to carry out any regulatory program or any activity other
than research, development, and related reporting, information
dissemination, and coordination activities specified in this title.
Nothing in this title shall be construed to limit the authority of the
Administrator or of any other agency or instrumentality of the
United States under any other authority of law.
SEC. 405. AUTHORIZATIONS.
There are authorized to be appropriated to carry out the activities
under this title and under section 118(k) of the Superfund Amend-
ments and Reauthorization Act of 1986 (relating to radon gas assess-
ment and demonstration program) not to exceed $5,000,000 for each
of the fiscal years 1987, 1988, and 1989. Of such sums appropriated
in fiscal years 1987 and 1988, two-fifths shall be reserved for the
implementation of section 118(kX2).
TITLE V—AMENDMENTS OF THE INTERNAL
REVENUE CODE OF 1986.
SEC. S01. SHORT TITLE.
This title may be cited as the "Superfund Revenue Act of 1986".
PART I—SUPERFUND AND ITS REVENUE
SOURCES
SEC 511. EXTENSION OF ENVIRONMENTAL TAXES.
(a) In General.—Subsection (d) of section 4611 of the Internal
Revenue Code of 1986 (relating to termination) is amended to read
as follows:
"(d) Application of Taxes.—
"(1) In general.—Except as provided in paragraphs (2) and
(3), the taxes imposed by this section shall apply after December
31,1986, and before January 1,1992.
"(2) No TAX IF UNOBLIGATED BALANCE IN FUND EXCEEDS
S3,300,ooo,ooo.—If on December 31, 1989, or December 31,
1990—
"(A) the unobligated balance in the Hazardous Substance
Superfund exceeds $3,500,000,000, and
"(B) the Secretary, after consultation with the Adminis-
trator of the Environmental Protection Agency, determines
that the unobligated balance in the Hazardous Substance
Superfund will exceed $3,500,000,000 on December 31 of
1990 or 1991, respectively, if no tax is imposed under section
59A, this section, and sections 4661 and 4671,
then no tax shall be imposed under this section during 1990 or
1991, as the case may be.
"(3) No TAX IF AMOUNTS COLLECTED EXCEED S6,650,000,000.—
"(A) Estimates by secretary.—The Secretary as of the
close of each calendar quarter (and at such other times as
the Secretary determines appropriate) shall make an esti-
-------
H.R. 2005—149
mate of the amount of taxes which will be collected under
section 59A, this section, and sections 4661 and 4671 and
credited to the Hazardous Substance Superfund during the
period beginning January 1,1987, and ending December 31,
1991.
"(B) Termination if S6,650,ooo,ooo credited before
January l, 1992.—If the Secretary estimates under
subparagraph (A) that more than $6,650,000,000 will be
credited to the Fund before January 1,1992, no tax shall be
imposed under this section after the date on which (as
estimated by the Secretary) $6,650,000,000 will be so cred-
ited to the Fund."
(b)	Technical Amendment.—Section 303 of the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980 is
hereby repealed.
(c)	Effective Date.—The amendments made by this section shall
take effect on January 1,1987.
SEC 512. INCREASE IN TAX ON PETROLEUM.
(a)	In General.—Subsections (a) and (b) of section 4611 of the
Internal Revenue Code of 1986 (relating to environmental tax on
petroleum) are each amended by striking out "of 0.79 cent a barrel"
and inserting in lieu thereof "at the rate specified in subsection (c)".
(b)	Increase in Tax.—Section 4611 of such Code is amended by
redesignating subsections (c) and (d) as subsections (d) and (ej,
respectively, and by inserting after subsection (b) the following new
subsection:
"(c) Rate of Tax.—
"(1) In general.—Except as provided in paragraph (2), the
rate of the taxes imposed by this section is 8.2 cents a barrel.
"(2) Imported petroleum products.-The rate of the tax
imposed by subsection (aX2) shall be 11.7 cents a barrel." .
(c)	Allowance of Credit for Crude Oil Returned to Pipeline.—
Section 4612 of such Code (relating to definitions and special rules)
is amended by redesignating subsection (c) as subsection (d) and by
inserting after subsection (b) the following new subsection:
"(c) Credit Where Cruse Oil Returned to Pipeline.—Under
regulations prescribed by the Secretary, if an operator of a United
States refinery—
"(1) removes crude oil from a pipeline, and
"(2) returns a portion of such crude oil into a stream of other
crude oil in the same pipeline,
there shall be allowed as a credit against the tax imposed by section
4611 to such operator an amount equal to the product of the rate of
tax. imposed by section 4611 on the crude oil so removed by such
operator and the number of barrels of crude oil returned by such
operator to such pipeline. Any crude oil so returned shall be treated
for purposes of this subchapter as crude oil on which no tax has been
imposed by section 4611."
(d)	Effective Date.—The amendments made by this section «h»n
take effect on January 1,1987.
SEC 613. CHANGES RELATING TO TAX ON CERTAIN CHEMICALS.
(a) Increase in Rate of Tax on Xylene.—The table contained in
subsection (b) of section 4661 of the Internal Revenue Code of 1986
(relating to tax on certain chemicals) is amended by adding at the
end thereof the following new sentence:
-------
H.R. 2005—150
'Tor periods before 1992, the item relating to xylene in the preced-
ing table shall be applied by substituting '10.13' for '4.87'."
(b)	Exemption fob Exports or Taxable Chemicals.—
(1)	Section 4662 of such Code (relating to definitions and
special rules) is amended by redesignating subsection (e) as
subsection (f) and by inserting after subsection (d) the following
new subsection:
"(e) Exemption for Exports of Taxable Chemicals.—
"(1) Tax-free sales.—
"(A) In general.—No tax shall be imposed under section
4661 on the sale by the manufacturer or producer of any
taxable chemical for export, or for resale by the purchaser
to a second purchaser for export.
"(B) Proof of export required.—Rules similar to the
rules of section 4221(b) shall apply for purposes of subpara-
graph (A).
"(2) Credit or refund where tax paid.—
"(A) In general.—Except as provided in subparagraph
(B), if—
"(i) tax under section 4661 was paid with respect to
any taxable chemical, and
"(iiXD such chemical was exported by any person, or
"(ID such chemical was used as a material in the
manufacture or production of a substance which was
exported by any person and which, at the time of
export, was a taxable substance (as defined in section
4672(a)),
credit or refund (without interest) of such tax shall be
allowed or made to the person who paid such tax.
"(B) Condition to allowance.—No credit or refund shall
be allowed or made under subparagraph (A) unless the
person who paid the tax establishes that he—
"(i) has repaid or agreed to repay the amount of the
tax to the person who exported the taxable chemical or
taxable substance (as so defined), or
"(ii) has obtained the written consent of such ex-
porter to the allowance of the credit or the making of
the refund.
"(3) Regulations.—The Secretary shall prescribe such regu-
lations as may be necessary to carry out the purposes of this
(2)	Paragraph (1) of section 4662(d) of such Code (relating to
refund or credit for certain uses) is amended—
(A)	by striking out "the sale of which by such person
would be taxable under such section" and inserting in lieu
thereof "which is a taxable chemical", and
(B)	by striking out "imposed by such section on the other
substance manufactured or produced" and inserting in. lieu
thereof "imposed by such section on the other substance
manufactured or produced (or which would have been im-
posed by such section on such other substance but for
subsection (b) or (e) of this section)".
(c)	Special Rule for Xylene.—Subsection (b) of section 4662 of
such Code (relating to exceptions; other special rules) is amended by
adding after paragraph (6) the following new paragraph:
"(7) Special rule for xylene.—Except in the case of any
substance imported into the United States or exported from the
-------
H.R. 2005—151
United States, the term 'xylene' does not include any separated
isomer of xylene."
(d)	Exemption foe Certain Recycled Chemicals.—Subsection (b)
of section 4662 of such Code (relating to exceptions; other special
rules) is amended by adding after paragraph (7) the following new
paragraph:
"(8) Recycled chromium, cobalt, and nickel—
"(A) In general.—No tax shall be imposed under section
4661(a) on any chromium, cobalt, or nickel which is diverted
or recovered in the United States from any solid waste as
part of a recycling process (and not as part of the original
manufacturing or production process).
"(B) Exemption not to apply while corrective action
uncompleted.—Subparagraph (A) shall not apply during
any period that required corrective action by the taxpayer
at the unit at which the recycling occurs is uncompleted.
"(C) Required corrective action.—For purposes of
subparagraph (B), required corrective action shall be
treated as uncompleted during the period—
"(i) beginning on the date that the corrective action
is required by the Administrator or an authorized State
pursuant to—
"(I) a fin**! permit under section 3005 of the Solid
Waste Disposal Act or a final order under section
3004 or 3008 of such Act, or
"(ID a final order under section 106 of the Com-
prehensive Environmental Response, Compensa-
tion, and Liability Act of 1980, and
"(ii) ending on the date the Administrator or such
State (as the case may be) certifies to the Secretary that
such corrective action has been completed.
"(D) Special rule for groundwater treatment.—In the
case of corrective action requiring groundwater treatment,
such action shall be treated as completed as of the close of
the 10-year period beginning on the date such action is
required if such treatment complies with the permit or
order applicable under subparagraph (CXi) throughout such
period. The preceding sentence shall cease to apply begin-
ning on the date such treatment ceases to comply with such
permit or order.
"(E) Solid waste.—For purposes of this paragraph, the
term 'solid waste' has the meaning given such term by
section 1004 of the Solid Waste Disposal Act, except that
such term shall not include any byproduct, coproduct, or
other waste from any process of smelting, refining, or other-
wise extracting any metal."
(e)	Exemption for Animal Feed Substances.—
(1) In general.—Subsection (b) of section 4662 of such Code
(relating to exceptions; other special rules) is amended by
adding after paragraph (8) the following new paragraph:
"(9) Substances used in the production of animal feed.—
"(A) In general.—In the case of—
"(i) nitric acid,
"(ii) sulfuric acid,*
"(iii) ammonia, or
"(iv) methane used to produce ammonia,
-------
H.R. 2005—152
which is a qualified animal feed substance, no tax shall be
imposed under section 4661(a).
"(B) QUAXJFBD ANIMAL RED SUBSTANCE.—For purposes of
this section, the term 'qualified animal feed substance'
means any substance—
"(i) used in a qualified animal feed use by the manu-
facturer, producer, or importer,
"(ii) sold for use by any purchaser in a qualified
animal feed use, or
"(iii) sold for resale by any purchaser for use, or
resale for ultimate use, in a qualified animal feed use.
"(O Qualified animal feed use.—The term 'qualified
animal feed use' means any use in the manufacture or
production of animal feed or animal feed supplements, or of
ingredients used in animal feed or animal feed
supplements.
"(D) Taxation of nonqualified sale ob use.—For pur-
poses of section 4661(a), if no tax was imposed by such
section on the sale or use of any chemical by reason of
subparagraph (A), the 1st person who sells or uses such
chemical other than in a sale or use described in subpara-
graph (A) shall be treated as the manufacturer of such
chemical.".
(2) Refund or credit for substances used in the prod""-
tion of animal feed.—Subsection (d) of section 4662 of
Code (relating to refunds and credits with respect to the ta
certain chemicals) is amended by adding at the end thereof
following new paragraph:
"(4) Use in the production of animal feed.—Under regula-
tions prescribed by the Secretary, if—
"(A) a tax under section 4661 was paid with respect to
nitric acid, sulfuric acid, ammonia, or methane used to
produce ammonia, without regard to subsection (bX9), and
"(B) any person uses such substance as a qualified animal
feed substance.
then an amount equal to the excess of the tax so paid over the
tax determined with regard to subsection (bX9) shall be allowed
as a credit or refund (without interest) to such person in the
same manner as if it were an overpayment of tax imposed by
this section."
(f) Certain Exchanges by Taxpayers Not Treated as Sales.—
Subsection (c) of section 4662 of such Code (relating to use by
manufacturers) is amended.to read as follows:
"(c) Use and Certain Exchanges by Manufacturer, Etc.—
"(1) Use treated as sale.—Except as provided in subsections
(b) and (e), if any person manufactures, produces, or imports any
taxable chemical and uses such chemical, then such person
shall'be liable for tax under section 4661 in the same manner as
if such chemical were sold by such person.
"(2) Special rules for inventory exchanges.—
"(A) In general.—Except as provided in this paragraph,
in any case in which a manufacturer, producer, or importer
of a taxable chemical exchanges such chemical as pa' n
inventory exchange with another person—
"(i) such exchange shall not be treated asasi i
-------
H.R. 2005—153
"(ii) such other person shall, for purposes of section
4661, be treated as the manufacturer, producer, or
importer of such chemical
"3) Registration requirement.—Subparagraph (A)
shall not apply to any inventory exchange unless—
"(i) both parties are registered with the Secretary as
manufacturers, producers, or importers of taxable
chemicals, and
"(ii) the person receiving the taxable chemical has, at
such time as the Secretary may prescribe, notified the
manufacturer, producer, or importer of such person's
registration number and the internal revenue district
in which such person is registered.
"(C) Inventory exchange.—For purposes of this para-
graph, the term 'inventory exchange' means any exchange
in which 2 persons exchange property which is, in the
hands of each person, property described in section
1221(1)."
(g)	Special Rules Relating to Hydrocarbon Streams Contain-
ing Organic Taxable Chemicals.—Subsection (b) of section 4662 of
such Code (relating to exceptions; other special rules) is amended by
adding after paragraph (9) the following new paragraph:
"(10) Hydrocarbon streams containing mixtures of or-
ganic TAXABLE CHEMICALS.—
"(A) In general.—No tax shall be imposed under section
4661(a) on any organic taxable chemical while such chemi-
cal is part of an intermediate hydrocarbon stream contain-
ing a mixture of organic taxable chemicals.
(B) Removal, etcl, treated as use.—For purposes of this
part, if any organic taxable chemical on which no tax was
imposed by reason of subparagraph (A) is isolated, ex-
tracted, or otherwise removed from, or ceases to be part of,
an intermediate hydrocarbon stream—
"(i) such isolation, extraction, removal, or cessation
shall be treated as use by the person causing such
event, and
"(ii) such person shall be treated as the manufacturer
of such rhgrnifal
"(C) Registration requirement.—Subparagraph (A)
shall not apply to any sale of any intermediate hydrocarbon
stream unless the registration requirements of clauses (i)
and (ii) of subsection (cX2XB) are satisfied.
"(D) Organic taxable chemical.—For purposes of this
paragraph, the term 'organic taxable chemical' means any
taxable chemical which is an organic substance."
(h)	Effective Dates.—
(1)	In general.—Except as otherwise provided in this subsec-
tion, the amendments made by this section shall take effect on
January 1,1987.
(2)	Repeal of tax on xylene tor periods before October i,
1986.—
(A) Refund of tax previously imposed.—
(i) In general.—In the case of any tax imposed by
section 4661 of the Internal Revenue Code of 1954 on
the sale or use of xylene before October 1, 1985, such
tax (including interest, additions to tax, and additional
amounts) shall not be assessed, and if assessed, the
-------
H.R. 2005—154
assessment shall be abated, and if collected shall be
credited or refunded (with interest) as an overpayment,
(ii) Condition" to allowance.—Clause (i) shall not
Sjply to a sale of xylene unless the person who (but for
auae (i)) would be liable for the tax imposed by section
4661 on such sale meets requirements similar to the
requirements of paragraph (1) of section 6416(a) of such
Code. For purposes of the preceding sentence, subpara-
graph (A) of section 6416(aXl) of such Code shall be
applied without regard to the material preceding "has
not collected".
(B) Waiver op statute of limitations.— If on the date of
the enactment of this Act (or at any time within 1 year
after such date of enactment) refund or credit of any over-
payment of tax resulting from the application of subpara-
graph (A) is barred by any law or rule of law, refund or
credit of such overpayment shall, nevertheless, be made or
allowed if claim therefor is filed before the date 1 year after
the date of the enactment of this Act.
(O Xylene to include isomers.—For purposes of this
paragraph, the term "xylene" shall include any isomer of
xylene whether or not separated.
(3)	Inventory exchanges.—
(A)	In genesax-—Except as otherwise provided in this
paragraph, the amendment made by subsection (f) sha1
apply as if included in the amendments made by section 21
of the Hazardous Substance Response Revenue Act of 1980.
(B)	Recipient must agree to treatment as manufac-
turer.—In the case of any inventory exchange before Janu-
ary lf 1987, the amendment made by subsection (f) shall
apply only if the person receiving the chemical from the
manufacturer, producer, or importer in the exchange
agrees to be treated as the manufacturer, producer, or
importer of such chemical for purposes of subchapter B of
chapter 38 of the Internal Revenue Code of 1954.
(C)	Exception where manufacturer paid tax.—In the
case of any inventory exchange before January 1, 1987. the
amendment made by subsection (f) shall not apply if the
manufacturer, producer, or importer treated such exchange
as a sale for purposes of section 4661 of such Code and paid
the tax imposed by such section.
(D)	Registration requirements.—Section 4662(cX2XB) of
such Code (as added by subsection (f7) shall apply .to ex-
changes made after December 31,1986.
(4)	Exports of taxable substances.—Subclause (II) of section
4662(eX2XAXii) of such Code (as added by this section) shall not
apply to the export of any taxable substance (as defined in
section 4672(a) of such Code) before January 1,1989.
(5)	Sales of intermediate hydrocarbon streams —
(A)	In general.—Except as otherwise provided in this
paragraph,' the amendment made by subsection (g) shall
apply as if included in the amendments made by section 211
of the Hazardous Substances Response Revenue Act of 1980.
(B)	Purchaser must agree to treatment as ma*
turer.—In the case of any sale before January 1,
any intermediate hydrocarbon stream, the ame.
made by subsection (g) shall apply only if the pun,—cr
-------
H.R. 2005—155
agrees to be treated as the manufacturer, producer, or
importer for purposes of subchapter B of chapter 38 of such
Code.
(C)	Exception where manufactures paid tax.—In the
case of any sale before January 1,1987, of any intermediate
hydrocarbon stream, the amendment made by subsection
(g) shall not apply if the manufacturer, producer, or im-
porter of such stream paid the tax imposed by section 4661
with respect to such sale on all taxable chemicals contained
in such stream.
(D)	Registration requirements.—Section 4662(bX10XO
of such Code (as added by subsection (g)). shall apply to
exchanges made after December 31,1986.
SEC 514. REPEAL OF POST-CLOSURE TAX AND TRUST FUND.
(a)	Repeal of Tax.—
(1)	Subchapter C of chapter 38 of the Internal Revenue Code
of 1986 (relating to tax on hazardous wastes) is hereby repealed.
(2)	The table of subchapters for such chapter 38 is amended by
striking out the item relating to subchapter C.
(b)	Repeal of Trust Fund.—Section 232 of the Hazardous Sub-
stance Response Revenue Act of 1980 is hereby repealed.
(c)	Effective Date.—
(1)	In general.—The amendments made by this section shall
take effect on October 1,1983.
(2)	Waiver of statute of limitations.—If on the date of the
enactment of this Act (or at any time within 1 year after such
date of enactment) refund or credit of any overpayment of tax
resulting from the application of this section is barred by any
law or rule of law, refund or credit of such overpayment shall,
nevertheless, be made or allowed if claim therefor is filed before
the date 1 year after the date of the enactment of this Act.
SEC 515. TAX ON CERTAIN IMPORTED SUBSTANCES DERIVED
FROM TAXABLE CHEMICALS.
(a) General Rule.—Chapter 38 of the Internal Revenue Code of
1986 is nmgndpH by	after subchapter B the following new
subchapter
"Subchapter C. Tax on Certain Imported Substances.
"Sec. 4671. Imposition of tax.
"Sec. 4672. Definitions and special rules.
-SEC. 4671. IMPOSITION OF TAX.
"(a) General Rule.—There is hereby imposed a tax on any
taxable substance sold or used by the importer thereof.
"(b) Amount of Tax.—
"(1) In general.—Except as provided in paragraph (2), the
amount of the tax imposed by subsection (a) with respect to any
taxable substance shall be the amount of the tax which would
have been imposed by section 4661 on the taxable chemicals
used as materials in the manufacture or production of such
substance if such taxable chemicals had been sold in the United
States for use in the manufacture or production of such taxable
substance.
"(2) Rate where importer does not furnish information to
secretary.—If the importer does not furnish to the Secretary
(at such time and in such manner as the Secretary shall pre-
-------
H.R. 2005—156
scribe) sufficient information to determine under paragraph (1)
the amount of the tax imposed by subsection (a) on any taxable
substance, the amount of the tax imposed on such taxable
substance shall be 5 percent of the appraised value of such
substance as of the time such substance was entered into the
• United States for consumption, use, or warehousing.
"(3) AiTTHoarr? to prescribe rate in uzv or paeagkaph !2>
rate.—The Secretary may prescribe for each taxable substance
a tax which, if prescribed, shall apply in lieu of the tax specified
in paragraph (2) with respect to such substance. The tax pre-
scribed by the Secretary shall be equal to the amount of tax
which would be imposed by subsection (a) with respect to the
taxable-substance if such substance were produced using the
predominant method of production of such substance.
"(c) Exemptions for Substances Taxed Under Sections 4611
and 4661.—No tax shall be imposed by this section on the sale or use
of any substance if tax is imposed on such sale or use under section
4611 or 4661.
"(d) Tax-Free Sales, Etc. pgr Substances Used as Certain
Fuels or in the Production of Fertilizer or Animal Feed.—Rules
similar to the following rules shall apply for purposes of applying
this section with respect to taxable substances used or sold for use as
described in such rules:
"(1) Paragraphs <2). (5), and (9) of section 4662(b) (relating to
tax-free sales of chemicals used as fuel or in the production of
fertilizer or animal feed).
"(2) Paragraphs (2), <3), and (4) of section 4662(d) (relating to
refund or credit of tax on certain chemicals used as fuel or in
the production of fertilizer or animal feed).
"(e) Termination.—No tax shall be imposed under this section
during any period during which no tax is imposed under section
4611(a).
-SEC. *672. DEFINITIONS AND SPECIAL RI LES..
"(a) Taxable Substance.—For purposes of this subchapter—
"(1) In general.—The term 'taxable substance' means any
substance which, at the time of sale or use by the importer, is
listed as a taxable substance by the Secretary for purposes of
this subchapter.
"(2) Determination or substances on list.—A substance
shall be listed under paragraph (1) if—
"(A) the substance is contained in the list under para-
graph (31, or
"(B) the Secretary determines, in consultation with the
Administrator of the Environmental Protection Agency and
the Commissioner of Customs, that taxable chemicals con-
stitute more than 50 percent of the weight of the materials
used to produce such substance (determined on the basis of
the predominant method of production).
"(3) Initial list of taxable substances.—
Cumene	Methylene chloride
Styrene	Polypropylene
Ammonium nitrate	Propylene glycol
Nickel oxide	Formaldehyde
Isopropyl alcohol	Acetone
-------
H. R. 2005—157
Ethylene glycol	Acrylonitrile
Vinyl chloride	Methanol
Polyethylene resins, total	Propylene oxide
Polybutadiene	Polypropylene resins
Styrane-butadieM, latex	Ethylene oxide
SlymifrJintadwmr. aapf	Ethylene dichloride
Synthetic rubber, not	Cydohfrrane
fillets
Urea	Iaophthalic acid
Femmickel	Maieic anhydride
Ferrochromium nov 3 pet	Phthalic anhydride
Ferrochrome ov 3 pet carbon	Ethyl methyl ketone
Un wrought w»Hn»i	Chloroform
Nickel waste and scrap	Carbon tetrachloride
Wrought ni«fa>l rods and wire	Chromic acid
Nickel powders	Hydrogen peroxide
Phenolic resins	Polystyrene homopolymer resins
Polyvinylchloride resins	Melamine
Polystyrene resins and copolymers Acrylic and methnrrylic acid resins
Ethyl alcohol for nonbeverage use Vinyl resins 	
Ethylbenzene	Vinyl resins, NSPF.
"(4) Modifications to list.—
"(A) In general.—The Secretary may add substances to
or remove substances from the list under paragraph (3)
(including items listed by reason of paragraph (2)) as nec-
essary to carry out the purposes of this subchapter.
"(B) Authority to add substances to lot based on
value.—The Secretary may, to the extent necessary to
carry out the purposes of this subchapter, add any sub-
stance to the list under paragraph (3) if such substance
would be described in paragraph (2KB) if 'value' were sub-
stituted for 'weight' therein.
"(b) Other Definitions.—For purposes of this subchapter—
"(1) Importer.—The term 'importer' means the person enter-
ing the taxable substance for consumption, use, or warehousing.
(2) Taxable chemicals; united states.—The terms 'taxable
fhgmiral' and United States' have the respective mannings
given such terms by section 4662(a).
"(c) Disposition of Revenues From Puerto Rico and the Virgin
Islands.—The provisions of subsections (aX3) and (bX3) of section
7652 shall not apply to any tax imposed by section 4671."
(b)	Clerical Amendment.—The table of subchapters for chapter
38 of such Code is amended by adding after the item relating to
subchapter B the following new item;
"Subchapter C. Tax on certain imported substances."
(c)	Effective Date.—The amendments made by this section shall
take effect on January 1,1989.
(d)	Study.—
(1)	In general.—The Secretary of the Treasury or his dele-
gate shall conduct a study of issues relating to the implementa-
tion of—
(A)	the tax imposed by the section 4671 of the Internal
Revenue Code of 1986 (as added by this section), and
(B)	the credit for exports of taxable substances under
section 4661(eX2XAXiiXII) of such Code.
In conducting such study, the Secretary of the Treasury or his
delegate shall consult with the Environmental Protection
Agency and the International Trade Commission.
(2)	Report.—The report of the study under paragraph (1) shall
be submitted not later than January 1, 1988, to the Committee
-------
a R. 2005—158
on Ways and Means of the House of Representatives and the
Committee on Finance of the Senate.
SEC 516. ENVIRONMENTAL TAX.
(a)	In General—Subchapter A of chapter 1 of the Internal
Revenue Code of 1986 (relating to income taxes) is amended by
adding at the end thereof the following new pare:
"PART VII—ENVIRONMENTAL TAX
"Sec 59A. Environmental tax.
"SEC 59A. ENVIRONMENTAL TAX.
"(a) Imposition of Tax.—In the case of a corporation, there is
hereby imposed (in addition to any other tax imposed by this
subtitle) a tax equal to 0.12 percent of the excess of—
"(1) the modified alternative minimum taxable income of
such corporation for the taxable year, over
"(2) S2.000.000.
"(b) Modified Alternative Minimum Taxable Income.—For
purposes of this section, the term 'modified alternative minimum
taxable income' means alternative minimum taxable income (as
defined in section 55(bX2)) but determined without regard to—
"(1) the alternative tax net operating loss deduction (as de-
. fined in section 56(d)), and
"(2) the deduction allowed under section l64(aX5).
"(c) Special Rules.—
"(1) Short taxable years.—The application of this section to
taxable years of less than 12 months snail be in accordance with
regulations prescribed by the Secretary.
"(2) Section 15 not to apply.—Section 15 shall not apply to
the tax imposed by this section.
"(d) Application of Tax.—
"(1) In general.—The tax imposed by this section shall apply
to taxable years beginning after December 31, 1986, and before
January 1,1992.
"(2) Earlier termination.—The tax imposed by this section
shall not apply to taxable years—
"(A) beginning during a calendar year during which no
tax is imposed under section 4611(a) by reason of paragraph
(2) of section 4611(e), and
"(B) beginning after the calendar year which includes the
termination date under paragraph (3) of section 4611(e)."
(b)	Technical Amendments.—
(1) No credits allowed against tax.—
(A)	Paragraph (2) of section 26(b) of such Code, as
amended by the Tax Reform Act of 1986, is amended by
redesignating subparagraphs (B) through (J) as subpara-
graphs (C) through (K), respectively, and by inserting after
subparagraph (A) the following new subparagraph:
"(B) section 59A (relating to environmental tax),".
(B)	Paragraph (3) of section 936(a) of such Code, as so
amended, is amended by redesignating subparagraphs (A),
(B), and (C) as subparagraphs (B), (O, and (D), respectively,
and by inserting before subparagraph (B) (as so redesig-
nated) the following new subparagraph:
"(A) section 59A (relating to environmental tax),"..
-------
H.R.2005—159
(2)	Tax to be deductible, for income tax purposes.—
(A)	Subsection (a) of section 164 of such Code (relating to
deduction for taxes), as so amended, is amended by insert-
ing after paragraph (4) the following new paragraph:
"(5) The environmental tax imposed by section 59A.'
(B)	Subsection (a) of section 275 of such Code is amended
by adding at the end thereof the following new sentence:
"Paragraph (1) shall not apply to the tax imposed by section
59A."
(3)	Limitation in case of controlled corporations.—
Subsection (a) of section 1561 of such Code (relating to limita-
tions on certain multiple tax benefits in the case of certain
controlled corporations), as amended by the Tax Reform Act of
1986, is amended—
(A)	by striking out "and" at the end of paragraph (2), by
striking out the period at the end of paragraph (3) and
inserting in lieu thereof and", and by inserting after
paragraph (3) the following new paragraph:
"(4) one $2,000,000 amount for purposes of computing the tax
imposed by section 59A.", and
(B)	by striking out "(and the amount specified in para-
graph (3))" and inserting in lieu thereof ", the amount
specified in paragraph (3), and the amount specified in
paragraph (4)".
(4)	Amendments to estimated tax provisions.—
(A) Tax liability must be estimated.—
(i)	Paragraph (1) of section 6154(c) of such Code, as so
amended, is amended by striking out "and" at the end
of subparagraph (A), by striking out "over" at the end
of subparagraph (B) and inserting in lieu thereof
"and", and by adding at the end thereof the following
new subparagraph:
"(C) the environmental tax imposed by section 59A_
over".
(ii)	Subsection (a) of section 6154 of such Code is
amended by striking out "section 11" and inserting
"section 11, 59A,".
(C)	Conforming amendment to overpayment of esti-
mated tax.—Subparagraph (A) of section 6425(cXl) of such
Code, as amended by the Tax Reform Act of 1986, is
amended by striking out "plus" at the end of clause (i), by
striking out "over" at the end of clause (ii) and inserting in
lieu thereof "plus", and by adding at the end thereof the
following new clause:
"(iii) the tax imposed by section 59A, over".
(D)	Conforming amendment to penalty for failure to
pay estimated tax.—Paragraph (1) of section 6655(f) of such
Code (defining tax), as so amended, is amended by striking
out "plus" at the end of subparagraph (A), by striking out
"over" at the end of subparagraph (B) and inserting in lieu
thereof "plus", and by adding at the end thereof the follow-
ing new subparagraph:
"(C) the tax imposed by section 59A, over".
(5)	Clerical amendment.—The table of parts for subchapter
A of chapter 1 of such Code is amended by adding at the end
thereof the following new item:
"Part VII. Environmental tax."
-------
H. R. 2005—160
(c) Effective Date.—The amendments made by this section shall
apply to taxable years beginning after December 31,1986.
SEC. 517. HAZARDOUS SUBSTANCE SUPERFUND.
(a) In General.—Subchapter A of chapter 98 of the Internal
Revenue Code of 1986 (relating to establishment of trust funds) is
amended by adding after section 9506 the following new section:
"SEC 9507. HAZARDOUS SUBSTANCE SUPERFUND.
"(a) Creation of Trust Fund.—There is established in the Treas-
ury of the United States a trust fund to be known as the 'Hazardous
Substance Superfund' (hereinafter in this section referred to as the
'Superfund'), consisting of such amounts as may be—
"(1) appropriated to the Superfund as provided in this section,
"(2) appropriated to the Superfund pursuant to section 517(b)
of the Superfund Revenue Act of 1986, or
"(3) credited to the Superfund as provided in section 9602(b).
"(b) Transfers to Superfund.—There are hereby appropriated to
the Superfund amounts equivalent to—
(1) the taxes received in the Treasury under section 59A,
4611,4661, or 4671 (relating to environmental taxes),
"(2) amounts recovered on behalf of the Superfund under the
Comprehensive Environmental Response, Compensation, and
Liability Act of 1980 (hereinafter in this section referred to as
'CERCLA'),
"(3) all moneys recovered or collected under section
311(bX6XB) of the Clean Water Act, 	
"(4) penalties assessed under title I of CERCLA, and	
"(5) punitive damages under section 107(cX3) of CERCLA.
"(c) Expenditures From Superfund.—
"(1) In general.—Amounts in the Superfund shall be avail-
able, as provided in appropriation Acts, only for purposes of
ma k in pr expenditures—
(A) to carry out the purposes of—
"(i) paragraphs (1), (2), (5), and (6) of section 111(a) of
CERCLA as in effect on the date of the enactment of
the Superfund Amendments and Reauthorization Act
of 1986,
"(ii) section 111(c) of CERCLA (as so in effect), other
than paragraphs (1) and (2) thereof, and
"(iii) section lll(m) of CERCLA (as so in effect), or
"(B) hereafter authorized by a law which does not au-
thorize the expenditure out of the Superfund for a general
purpose not covered by subparagraph (A) (as so in effect).
"(2) Exception for certain transfers, etc., of hazardous
substances.—No amount in the Superfund or derived from the
Superfund shall be available or used for the transfer or disposal
of hazardous waste carried out pursuant to a cooperative agree-
ment between the Administrator of the Environmental Protec-
tion Agency and a State if the following conditions apply—
"(A) the transfer or disposal, if made on December 13,
1985, would not comply with a State or local requirement,
"(B) the transfer is to a facility for which a final permit
under section 3005(a) of the Solid Waste Disposal Act was
issued after January 1, 1983, and before November 1, 1984,
and
-------
H.R. 2005—161
. "(C) the transfer is from a facility identified as the McColI
Site in Fullerton, California.
"(d) Authority To Borrow.—
"(1) In general.—There are authorized to be appropriated to
the Superfund, as repayable advances, such sums as may be
necessary to carry out the purposes of the Superfund.
"(2) Limitation on aggregate advances.—The maximum
aggregate amount of repayable advances to the Superfund
which is outstanding at any one time shall not exceed an
amount equal to the amount which the Secretary estimates will
be equal to the sum of the amounts appropriated to the
Superfund under subsection (bXl) during the following 24
months.
"(3) Repayment of advances.—
"(A) In general.—Advances made to the Superfund shall
' be repaid, and interest on such advances shall be paid, to
the general fund of the Treasury when the Secretary deter-
mines that moneys are available for such purposes in the
Superfund.
"(B).Final repayment.—No advance shall be made to the
Superfund after December 31, 1991, and all advances to
such Fund shall be repaid on or before such date.
"(C) Rate of interest.—Interest on advances made to the
Superfund shall be at a rate determined by the Secretary of
the Treasury (as of the close of the calendar month preced-
ing the month in which the advance is made) to be equal to
the current average market yield on outstanding market-
able obligations of the United States with remaining peri-
ods to maturity comparable to the anticipated period
during which the advance will be outstanding and shall be
compounded annually.
"(e) Liability of United States Limited to Amount in Trust
Fund.—
"(1) General rule.—Any claim filed against the Superfund
may be paid only out of the Superfund.
"(2) Coordination with other provisions.—Nothing in
CERCLA or the Superfund Amendments and Reauthorization
Act of 1986 (or in any amendment made by either of such Acts)
shall authorize the payment by the United States Government
of any amount with respect to any such claim out of any source
other than the Superfund.
"(3) Order in which unpaid claims are to be paid.—If at any
time the Superfund has insufficient funds to pay all of the
payable out of the Superfund at such time, such claims
shall, to the extent permitted under paragraph (1), be paid in
full in the order in which they were finally determined."
(b) Authorization of Appropriations.—There is authorized to be
appropriated, out of any money in the Treasury not otherwise
appropriated, to the Hazardous Substance Superfund for fiscal
year—
(1)	1987, 5250,000,000,
(2)	1988, $250,000,000,
(3)	1989, $250,000,000,
(4)	1990, $250,000,000, and
(5)	1991, $250,000,000,
plus for each fiscal year an amount equal to so much of the
aggregate amount authorized to be appropriated under this subsec-
-------
H.R. 2005—162
tion (and paragraph (2) of section 221(b) of the Hazardous Substance
Response Act of 1980, as in effect before its repeal) as has not been
appropriated before the beginning of the fiscal year involved.
(c)	Conforming Amendments.—
(1)	Subtitle B of the Hazardous Substance Response Revenue
Act of 1980 (relating to establishment of Hazardous Substance
Response Trust Fund), as amended by section 204 of this Act, is
hereby repealed.
(2)	Paragraph (11) of section 101 of the Comprehensive
Environmental Response, Compensation, and Liability Act of
1980 is amended to read as follows:
"(11) The term 'Fund' or Trust Fund' means the Hazardous
Substance Superfund established by section 9507 of the Internal
Revenue Code of 1986."
(d)	Clerical Amendment.—The table of sections for subchapter A
of chapter 98 of such Code is amended by adding after the item
relating to section 9506 the following new item:
"Sec. 9507. Hazardous Substance Superfund."
(e)	Effective Date.—
(1)	In.general.—The amendments made by this section shall
take effect on January 1, 1987.
(2)	Superfund treated as continuation of old trust
fund.—The Hazardous Substance Superfund established by the
amendments made by this section shall be treated for all pur-
poses of law as a continuation of the Hazardous Substance
Response Trust Fund established by section 221 of the Hazard-
ous Substance Response Revenue Act of 1980. Any reference in
any law to the Hazardous Substance Response Trust Fund
. established by such section 221 shall be deemed to include
(wherever appropriate) a reference to the Hazardous Substance
Superfund established by the amendments made by this section.
PART II—LEAKING UNDERGROUND STORAGE
TANK TRUST FUND AND ITS REVENUE SOURCES
SEC 521. ADDITIONAL TAXES' ON GASOLINE. DIESEL FUEL. SPECIAL
MOTOR FUELS. FUELS USED IN AVIATION. AND FUELS USED IN
COMMERCIAL TRANSPORTATION ON INLAND WATERWAYS.
(a) General Rule.—
(1) Gasoline.—
(A) Gasoline tax before amendment by tax reform act
OF 1986.— .
(i) In general.—Section 4081 of the Internal Reve-
nue Code of 1986 (relating to imposition of tax on
gasoline), as in effect on the day before the date of the
enactment of the Tax Reform Act of 1986, is amended
by striking out subsections (a) and (b) and inserting in
lieu thereof the following:
"(a) In General.—There is hereby imposed on gasoline sold by the
producer or importer thereof, or by any producer of gasoline, a tax
at the rate specified in subsection (b).
"(b) Rate of Tax.—
"(1) In general.—The rate of the tax imposed by this section
is the sum of—
"(A) the Highway Trust Fund financing rate, and
-------
H.R. 2005-163
"(B) the Leaking Underground Storage Tank Trust Fund
financing rate.
"(2) Rates.—For purposes of paragraph (1)—
. "(A) the Highway Trust Fund financing rate is 9 cents a
gallon, and
"(B) the T ^airing Underground Storage Tank Trust Fund
financing rate is 0.1 cents a gallon."
(ii) Termination.—Section 4081 of such Code, as so in
effect, is amended by adding at the end thereof the
following new subsection:
"(d) Termination.—
"(1) Highway trust fund financing rate.—On and after
October 1, 1988, the Highway Trust Fund financing Tate under
subsection (bX2XA) shall not apply.
"(2) Leaking underground storage tank trust fund
financing rate.—
"(A) In general.—The Leaking Underground Storage
Tank Trust Fund financing rate under subsection (b)(2KB)
shall not apply after the earlier of—
"(i) December 31.1991, or
"(ii) the last day of the termination month.
"(B) Termination month.—For purposes of subpara-
graph (A), the termination month is the 1st month as of the
close of which the Secretary estimates that the net reve-
nues from the taxes imposed by this section (to the extent
attributable to the firing Underground Storage Tank
Trust Fund financing rate under subsection (bX2xB)), sec-
tion 4041(d), and section 4042 (to the extent attributable to
the T ^airing Underground Storage Tank Trust Fund financ-
ing rate under section 4042(b)) are at least $500,000,000.
"(C) Net revenues.—For purposes of subparagraph (B),
the term 'net revenues' means the excess of gross revenues
over amounts payable by reason of section 9508(cX2) (relat-
ing to transfer from I
-------
H.R. 2005—164
"(1) In general.—The rate of the tax imposed by this section
is the sum of—
"(A) the Highway Trust Fund financing rate, and
"(B) the Leaking Underground Storage Tank Trust Fund
financing rate.
"(2) Rates.—For purposes of paragraph (1)—
"(A) the Highway Trust Fund financing rate is 9 cents a
gallon, and
"(B) the Leaking Underground Storage Tank Trust Fund
financingrate is 0.1 cents a gallon.
"(e) Termination.—
"(1) Highway trust fund financing rate.—On and after
October 1, 1988, the Highway Trust Fund financing rate under
subsection (dX2XA) shall not apply.
"(2) Leaking underground storage tank trust fund
financing rate.—
"(A) In general.—The Taking Underground Storage
Tank Trust Fund financing rate under subsection (dX2XB)
shall not apply after the earlier of—
"(i) December 31,1991, or
"(ii) the last day of the. termination month.
"(B) Termination month.—For purposes of subpara-
graph (A), the termination month is the 1st month as of the
close of which the Secretary estimates that the net reve-
nues from the taxes imposed by this section (to the extent
attributable to the Taking Underground Storage Tank
Trust Fund financing rate under subsection (dX2XB)), sec-
tion 4041(d), and section 4042 (to the extent attributable to
the Leaking Underground Storage Tank Trust Fund financ-
ing rate under section 4042(b)) are at least $500,000,000.
"(C) Net revenues.—For purposes of subparagraph (B),
the term 'net revenues' means the excess of gross revenues
over amounts payable by reason of section 9508(cX2) (relat-
ing to transfer from Leaking Underground Storage Tank
Trust Fund for certain repayments and credits)."
(iii) Technical amendments.—Subsection (c) of sec-
tion 4081 of such Code, as amended by the Tax Reform
Act of 1986, is amended—
(I)	by striking out "subsection (a)" in paragraph
(1) and inserting in lieu thereof "subsection (d)",
and
(II)	by striking out "a rate" in paragraph (2) and
inserting in lieu thereof "a Highway Trust Fund
financing rate"..
(2) Diesel and special motor fuels; fuels used in avia-
tion.—Section 4041 of such Code (relating to tax on special
fuels) is amended by redesignating subsection (d) as subsection
(e) and by inserting after subsection (c) the following new
subsection:
"(d) Additional Taxes To Fund Leaking Underground Storage
Tank Trust Fund.—
"(1) Liquids other than gasoline, etc., used in motor ve-
hicles, motorboats, or trains.—In addition to the taxes im-
posed by subsection (a), there is hereby imposed a tax of 0.1
cents a gallon on benzol, benzene, naphtha, casing head and
natural gasoline, or any other liquid (other than kerosene, gas
-------
H.R. 2005—165
oil, liquefied petroleum gas, or fuel oil, or any product taxable
under section 4081)—
"(A) sold by any person to an owner, lessee, or other
operator of a motor vehicle, motorboat, or train for use as a
fuel in such motor vehicle, motorboat, or train, or
"(B) used by any person as a fuel in a motor vehicle,
motorboat, or train	there was a taxable sale of such
liquid under subparagraph (A).
'(2) Liquids used in aviation.—In addition to the taxes
imposed by subsection (c) and section 4081, there is hereby
imposed a tax of 0.1 cents a gallon on any liquid—
"(A) sold by any person to an owner, lessee, or other
operator of an aircraft for use as a fuel in such aircraft, or
"(B) used by any person as a fuel in an aircraft unless
there was a taxable sale of such liquid under subparagraph
(A).
The tax imposed by this paragraph shall not apply to any
product taxable under section 4081 which is used as a fuel in an
aircraft other than in noncommercial aviation.
"(3) Termination.—The taxes imposed by this subsection
shall not apply during any period during which the Tanking
Underground Storage Tank Trust Fund fmawrmg rate under
section 4081 does not apply."
(3) Fuel used in commercial transportation on inland
waterways.—Subsection (b) of section 4042 of such Code (relat-
ing to amount of tax on fuel used in commercial transportation
on inland waterways) is amended to read as follows:
"(b) Amount op Tax.—
"(1) In general—The rate of the tax imposed by subsection
(a) is the sum of—
"(A) the Inland Waterways Trust Fund financing rate,
and
"(B) the Leaking Underground Storage Tank Trust Fund
finawHrig' rate.
"(2) Rates.—For purposes of paragraph (1)—
"(A) the Inland Waterways Trust Fund financing rate is
10 cents a gallon, and .
"(B) the T^-alring Underground Storage Tank Trust Fund
financing rate is 0.1 cents a gallon.
"(3) Exception for fuel taxed under section 4041(d).—The
Leaking Underground Storage Tank Trust Fund financing rate
under paragraph (2XB) shall not apply to the use of any fuel if
tax under section 4041(d) was imposed on the sale of such fuel or
is imposed on such use.
"(4) Termination of leaking underground storage tank
trust fund financing rate.—The	Underground Stor-
age Tank Trust Fund financing rate under paragraph (2KB)
shall not apply during any period during which the T-pairing
Underground Storage Tank Trust Fund fmnnHngr rate under
section 4081 does not apply."
(b) Additional Taxes Not Transferred to Highway Trust
Fund, Airport and Airway Trust Fund, and Inland Waterways
Trust Fund.—
(1) Highway trust fund.—
(A) In general.—Subsection (b) of section 9503 of such
Code (relating to transfer to Highway Trust Fund of
-------
a R. 2005—166
amounts equivalent to certain taxes) is amended by adding
at the end thereof the following new paragraph:
"(4) Certain additional taxes not transferred to highway
trust fund.—For purposes of paragraphs (1) and (2), there shall
not be taken into account the taxes imposed by section 4041(d)
and so much of the taxes imposed by section 4081 as is attrib-
utable to the leaking Underground Storage Tank Trust Fund
financing rate."
(B) Conforming amendment.—Subparagraph of sec-
tion 9503(cX4) of such Code (defining motorboat fuel taxes)
is amended by striking out "section 4081" and inserting in
lieu thereof "section 4081 (to the extent attributable to the
Highway Trust Fund financing rate)".
(2)	Airport and airway trust fund.—Subsection (b) of sec-
tion 9502 of such Code (relating to transfer to Airport and
Airway Trust Fund of amounts equivalent to certain taxes) is
amended—
(A)	by striking out "subsections (c) and (d) of section 4041"
in paragraph (1) and inserting in lieu thereof "subsections
(c) and 
-------
H.R. 2005—167
(3) Fuels used for nontaxable purposes.—
(A) Subsection (m) of section 6427 of such Code (relating
to termination), as in effect on the day before the date of
the enactment of the Tax Reform Act of 1986, is amended
by striking out "Subsections" and inserting in lieu thereof
"Except with respect to taxes imposed by section 4041(d)
and section 4081 at the Leaking Underground Storage Tank
Trust Fund financing rate, subsections".
(BXi) Section 6427 of such Code, as so in effect, is amended
by redesignating subsection (n) as subsection (o) and by
inserting after subsection (m) the following new subsection:
"(n) Payments Foe Taxes Imposed by Section 4041(d).—For pur-
poses of subsections (a), (b), and (c), the taxes imposed by section
4041(d) shall be treated as imposed by section 4041(a)."
(ii) Subparagraph (A) of section 1703(eXl) of the Tax
Reform Act of 1986 is amended—
(I) by striking out "and (o)" and inserting in lieu
thereof "(o), and (p)", and
(ID by striking out "and (n)" and inserting in lieu
thereof "(n), and (o)".
(C) Paragraph (1) of section 6427(f) of such Code (relating
to gasoline used to produce certain alcohol fuels) is
amended by striking out "at the rate" and inserting in lieu
thereof "at the Highway Trust Fund financing rate",
(d) Continuation or Cebtain Exemptions From Additional
Taxes, Etc.—
(1)	Subsection (b) of section 4041 of such Code (relating to
exemption for off-highway business use; reduction in tax for
qualified methanol and ethanol fuel) is amended by adding at
the end thereof the following new paragraph:
"(3) Coordination with taxes imposed by subsection (d) .—
"(A) Off-highway business use.—
"(i) In general.—Except as provided in clause (ii),
rules witnilwr to the rules of paragraph (1) shall apply
with respect to the taxes imposed by subsection (d).
"(ii) Limitation on exemption for off-highway
business use.—For purposes of subparagraph (A), para-
graph (1) shall apply only with respect to off-highway
business use in a vessel employed in the fisheries or in
the whaling business.
"(6) Qualified methanol and ethanol fuel.—la the
case of qualified methanol or ethanol fuel, subsection (d)
shall be applied by substituting '0.05 cents' for '0.1 cents' in
paragraph (1) thereof."
(2)	Paragraph (3) of section 4041(f) of such Code (relating to
exemption for farm use) is amended by striking out "On and
after and inserting in lieu thereof "Except with respect to the
taxes imposed by subsection (d), on and after".
(3)	The last sentence of section 4041(g) of such Code (relating
to other exemptions) is amended by striking out "Paragraphs"
and inserting in lieu thereof "Except with respect to the taxes
imposed by subsection (d), paragraphs".
(4XA) The last sentence of section 4221(a) of such Code (relat-
ing to certain tax-free sales) is amended by striking out "4081"
and inserting in lieu thereof "4081 (at the Highway Trust Fund
financing rate)".
-------
an. 2005—168
(B) Subparagraph (C) of section 1703(cX2) of the Tax Reform
Act of 1986 is amended to read as follows
"(C) Subsection (a) of section 4221 (relating to certain tax*
free sales) is amended—
"(i) by inserting 'or section 4081 (at the Highway
Trust Fund financing rate)' before 'section 4121' in the
1st sentence, and
"(ii) by striking out '4071, or 4081 (at the Highway
Trust Fund financing rate)' in the last sentence and
inserting in lieu thereof 'or 4071'."
(5) Paragraph (2) of section 6416(b) of such Code is amended by
inserting "or under paragraph (1XA) or (2XA) of section 4041(d)
after "section 4041(a)".
(e) Effective Date.—The amendments made by this section shall
take effect on January 1,1987.
SEC. 522. LEAKING UNDERGROUND STORAGE TANK TRUST FUND.
(a) In General.—Subchapter A of chapter 98 of the Internal
Revenue Code of 1986 (relating to establishment of trust funds) is
amended by adding after section 9507 the following new section:
"SEC 9608. LEAKING UNDERGROUND STORAGE TANK TRUST FUND.
"(a) Creation of Trust Fund.—There is established in the Treas-
ury of the United States a trust fund to be known as the 'leaking
Underground Storage Tank Trust Fund', consisting of such amounts
as may be appropriated or credited to such Trust Fund as provided
in this section or section 9602(b).
"(b) Transfers to Trust Fund.—There are herebv appropriated
to the Leaking Underground Storage Tank Trust Fund amounts
equivalent to—
"(1) taxes received in the Treasury under section 4041(d)
(relating to additional taxes on motor fuels),
"(2) taxes received in the Treasury under section 4081 (relat-
ing to tax on gasoline) to the extent attributable to the Leaking
Underground Storage Tank Trust Fund financing rate under
such section,
"(3) taxes received in the Treasury under section 4042 (relat-
ing to tax on fuel used in commercial transportation on inland
waterways) to the extent attributable to the leaking Under-
ground Storage Tank Trust Fund financing rate under such
section, and
"(4) amounts received in the Treasury and collected under
section 9003(hX6) of the Solid Waste Disposal Act
"(c) Expenditures.—
"(1) In general.—Except as provided in paragraph (2),
amounts in the Leaking Underground Storage Tank Trust Fund
shall be available, as provided in appropriation Acts, only for
purposes of making expenditures to carry out section 9003(h) of
the Solid Waste Disposal Act as in effect on the date of the
enactment of the Superfund Amendments and Reauthorization
Act of 1986.
"(2) Transfers from trust "fund for certain repayments
AND CREDITS.—
"(A) In general.—The Secretary shall pay from time to
time from the Leaking Underground Storage Tank Trust
Fund into the general fund of the Treasury amounts
equivalent to—
-------
H.R. 2005—169
"(i) amounts paid under—
"(I) section 6420 (relating to amounts paid in
respect of gasoline used on farms),
"(ID section 6421 (relating to amounts paid in
respect of gasoline used for certain nonhighway
purposes or by local transit systems), and
"(III) section 6427 (relating to fuels not used for
taxable purposes), and
"(ii) credits allowed under section 34, with respect to
the taxes imposed by sections 4041(d) and 4081 (to the
extent attributable to the Tanking Underground Stor-
age Tank Trust Fund financing rate under section
4081). .
"(B) Transfers based on estimates.—Transfers under
subparagraph (A) shall be made on the basis of estimates by
the Secretary, and proper adjustments shall be made in
amounts subsequently transferred to the extent prior esti-
mates were in excess of or less than the amounts required
to be transferred
"(d) Liability of the United States Limited to Amount in Trust
Fund.—
"(1) General rule.—Any claim filed against the Leaking
Underground Storage Tank Trust Fund may be paid only out of
such Trust Fund.
"(2) Coordination with other provisions.—Nothing in the
Comprehensive Environmental Response, Compensation, and
Liability Act of 1980 or the Superfund Amendments and He-
authorization Act of 1986 (or in any amendment made by either
of such Acts) shall authorize the payment by the United States
Government of any amount with respect to any such claim out
of any source other than the T^airing Underground Storage
Tank Trust Fund.
"(3) Order in which unpaid claims are to be paid.—If at any
time the T^airinp Underground Storage Tank Trust Fund has
insufficient funds to pay all of the riaimw out of such Trust Fund
at such time, such Hamis shall, to the extent permitted under
paragraph (1), be paid in full in the order in which they were
finally determined."
(b)	Clerical Amendment.—The table of sections for subchapter A
of chapter 98 of such Code is amended by adding after the item
relating to section 9507 the following new item:
"Sec. 9508.	Underground Storage Tank Trust Fund."
(c)	Effective Date.—The amendments made by this section shall
take effect on January 1,1987.
-------
H.R. 2005—170
PART m—COORDINATION WITH OTHER
PROVISIONS OF THIS ACT.
SEC 531. COORDINATION.
Notwithstanding any provision of this Act not contained in this
title, any provision of this Act (not contained in this title) which—
(1)	imposes any tax, premium, or fee,
(2)	establishes any trust fund, or
(3)	authorizes amounts to be expended from any trust fund,
shall have no force or effect.
Speaker of the House of Representatives.
Vice President of the United States and
President of the Senate.
-------
2
-------
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
| fl |09C.
OFFICE OF
SOLID WASTE AND EMERGENCY RESPONS
9375.1-5
STATE PROCUREMENT UNDFR SUPERFUND REMEDIAL COOPERATIVE AGREEMENTS
Procurement Under Assistance Agreements, 40 CFR Part 33, is
the Environmental Protection Agency's (EPA) regulation governing
procurement of supplies, services, and construction by assistance
recipients. This manual provides information on this regulation
and its relationship to State-managed Superfund remedial response.
When a State elects to manage a remedial response, it enters into a
Cooperative Agreement with EPA. A Superfund Cooperative Agreement
award is the assistance vehicle that transfers funds for response
to the State and documents both EPA and State responsibilities for
the project.
This manual is the result of many months of hard work and
reflects the input of a number of key people, including represen-
tatives of EPA's Regional Offices, State agency personnel working
through the Association of State and Territorial Solid Waste Manage-
ment Officials (ASTSWMO), and other offices in EPA headquarters,
especially the Office of General Counsel and the Grants Administra-
tion D i v i s i on .
This manual will be kept current with the issuance of addenda,
as necessary. A limited number of additional copies are available
and may be obtained by contacting: Chief, State and Regional
Coordination Branch (WH-548E), U.S. Environmental Protection Agency,
401 M Street, S.W., Washington, D.C. 20460, (202) 382-2443.
-------
9375 . 1-5
STATE PARTICIPATION IN THE
SUPERFUND PROGRAM
VOLUME II
STATE PROCUREMENT UNDER
SUPERFUND REMEDIAL COOPERATIVE AGREEMENTS
MARCH 1986
OSWER DIRECTIVE
9375.1-5
-------
9375.1-5
FOREWORD
In February 1984, the Environmental Protection
Agency's (EPA) Office of Emergency and Remedial Response
(OERR) issued the document State Participation in the
Superfund Remedial Program. This manual provides
comprehensive administrative and procedural guidance to
State and EPA personnel engaged in remedial response
implemented under the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980 (CERCLA)
or Superfund. The primary audience for this document is
State Project Officers (SPOs), EPA Remedial Project
Managers (RPMs) or officials with similar functions, as
well as concerned EPA Headquarters staff members. Thus,
the document contains information of interest to a wide
range of users.
This volume, State Procurement Under Superfund
Remedial Cooperative Agreements, is designed to stand
alone. The major reasons for this are twofold. First,
State procurement of assistance for CERCLA remedial
response is a topic that has a more limited audience than
does the general guidance document, and would not
necessarily be of interest to all personnel who use that
manual. Second, this document is more technical in scope
than Volume I of State Participation in the Superfund
Program. Volume II, however, is designed to be used in
conjunction with Volume I; all personnel using it are
directed to follow the procedures contained in both, as
appropriate, during CERCLA remedial response. Additional
assistance may be obtained from other Superfund guidance
documents: Guidance on Remedial Investigations Under
CERCLA, OERR, June 1985; Guidance on Feasibility Studies
Under CERCLA, OERR, June 1985; and Superfund Remedial
Design and Remedial Action Guidance, OERR, February 1985.
-i-
-------
TABLE OF CONTENTS
Section	Page
LIST OF ACRONYMS AND ABBREVIATIONS	a
I. INTRODUCTION		1-1
A.	SUPERFUND PROCUREMENT CONCERNS . .	1-1
B.	ORGANIZATION OF THIS VOLUME. . . .	1-3
II. PROCUREMENT REQUIREMENTS		II-l
A.	REGULATIONS APPLICABLE TO PROCURE-
MENT 		II-2
B.	FEDERAL AND STATE ROLES IN PRO-
CUREMENT 		11—4
C.	PROCUREMENT SYSTEM CERTIFICATION .	I1-4
D.	METHODS FOR PROCURING ASSISTANCE .	I1-6
E.	TYPES OF SUBAGREEMENTS		11-9
E.l Fixed Price Subagreements . .	II-9
E.2 Cost-Plus-Fixed-Fee
Subagreements 		I1-9
E.3 Percentage of Construction
Cost Subagreements		11-10
E.4 Cost-Plus-Percentage-of-
Cost Subagreements		11-10
E.5 Other Subagreement Types. . .	11-10
F.	PROMOTING COMPETITION		11-11
G.	MINORITY, WOMEN'S, SMALL, AND LABOR
SURPLUS AREA BUSINESS		11-12
H.	DOCUMENTATION			11-14
I.	CONFLICTS OF INTEREST AND CODE OF
CONDUCT		11-16
J. UNFAIR LABOR PRACTICES 		11-19
-ii-
-------
9375.1-5
TABLE OF CONTENTS
(Continued)
Section	Page
K. COST AND PRICE ANALYSIS	 11-21
K.l Cost Analysis	 11-21
K.2 Price Analysis	 11-21
L. PROFIT ANALYSIS	 11-24
III. PROCUREMENT OF ENGINEERING SERVICES . . . III-l
A.	GENERAL REQUIREMENTS FOR PROCURING
ENGINEERING SERVICES 	 III-l
B.	STANDARD METHOD OF COMPETITIVE
NEGOTIATION	 111-2
B.l Request for Proposals	 III-3
B.2 Evaluating Proposals ....	III-5
B.3	Negotiation and Subagreement
Award	 111-5
C.	OPTIONAL METHOD OF COMPETITIVE
NEGOTIATION	' II1-6
C.l	Soliciting Statements of
Qualifications	 111-6
C.2 Evaluating Statements of
Qualifications	 III-9
C.3 Soliciting and Evaluating
Proposals	 III-9
C.4 Negotiation and Award of
Subagreement 	 II1-9
D.	EXPEDITING PROCUREMENT OF ENGINEERING
SERVICES 	 III-l0
IV. ENGINEERING SERVICES DURING REMEDIAL
RESPONSE	 IV-1
A. REMEDIAL INVESTIGATION/FEASIBILITY
STUDY	 IV-3
-iii-
-------
9375.1-5
TABLE OF CONTENTS
(Continued)
Section	Page
B.	REMEDIAL DESIGN		IV-5
C.	TECHNICAL BIDDABILITY AND
CONSTRUCTABILITY REVIEW		IV-7
D.	BID PHASE SERVICES		IV-8
E.	CONSTRUCTION OVERSIGHT SERVICES . .	IV-10
F.	CLAIMS		IV-11
G.	OPERATION AND MAINTENANCE		IV-12
V. PROCUREMENT OF CONSTRUCTION SERVICES. . .	V-l
A.	DEVELOPMENT OF COST ESTIMATES
FOR CONSTRUCTION		V-3
B.	PREPARATION OF SUBAGREEMENT
DOCUMENTS		V-4
B.l Subagreement Provisions ....	v-5
B.2 Specifications		V-7
B.3 Bonds and Insurance		v-7
B. 3 . a Bonds		V-8
B.3.b Insurance		V-9
B.4 Payment Terms		V-10
B.5 Project Control Matters ....	V-12
B.6 Schedule Requirements 		V-13
B.7 Change Order Provisions ....	V-14
B.8 Health and Safety Issues . . .	V-14
B.9 Subagreement Close-Out Require-
ments 		V-l 5
C.	TECHNICAL BIDDABILITY AND CONSTRUCT-
ABILITY REVIEW		V—16
D.	SOLICITATION OF BIDS	V-18
E.	EVALUATION OF BIDS		V-19
E.l Bids Exceeding the Project
Budget		V-21
-iv-
-------
9375.1-5
TABLE OF CONTENTS
(Continued)
Section	Page
E.2 Bids Significantly Less Than
the Project Budget		V-25
F.	BID PROTESTS		V-26
G.	SUBAGREEMENT AWARD		V-27
VI. SUBAGREEMENT ADMINISTRATION 		VI-1
A.	PRELIMINARY PERFORMANCE PLANNING
CONFERENCE		VI-1
B.	MONITORING WORK PROGRESS - PERIODIC
PROGRESS REVIEW		VI-2
C.	CHANGE ORDER ADMINISTRATION		VI-5
C.l Conditions That Warrant a
Change Order		VI-6
C.2 Evaluating Change Order Requests	VI-8
C.3 Superfund Requirements for
Change Order Management ....	VI-11
C.4 Change Orders Requiring
Amendments to the Superfund
Cooperative Agreement 		VI1-12
C.5 Preparation of the Change Order	VII-13
D. CLAIMS		VI-14
D.l Causes of Claims		VI-14
D.2 Claims Prevention 		VI-16
D.3 Types of Claims		VI-17
D.4 Claims Resolution 		VI-19
D.5 Funding of Claims Resolution. .	VI-20
D. 6 Claims Negotiation		VI-20
D. 7 Settlement of Claims		VI-22
APPENDICES
APPENDIX A - GLOSSARY OF TERMS		A-l
APPENDIX B - REFERENCES		B-l
-v-
-------
9375.1-5
INDEX OF EXHIBITS
Exhibit
Number	Page
II/II-l SUMMARY OF REQUIREMENTS FOR PROCUREMENT
UNDER ASSISTANCE AGREEMENTS
(40 CFR Part 33)	 II-3
II/I1-2 SUMMARY OF PROCUREMENT METHODS AND
PROCEDURES	 11-8
II/I1-3 COST AND PRICE SUMMARY (EPA Form
5700-41)	 11-22
II/III-l STANDARD METHOD FOR PROCUREMENT OF
ENGINEERING SERVICES	 111-4
II/II1-2 OPTIONAL METHOD FOR PROCUREMENT OF
ENGINEERING SERVICES	 III-7
II/II1-3 METHODS FOR EXPEDITING PROCUREMENT. . . . II1-12
II/IV-1 TYPES OF ENGINEERING SERVICES TYPICALLY
USED DURING REMEDIAL RESPONSE ACTIVITIES IV-2
II/V-1 CONSTRUCTION CONTRACTOR PROCUREMENT
PROCEDURES		V-2
II/V-2 SAMPLE CHECKLIST OF CONSTRUCTION
SUBAGREEMENT BID DOCUMENT CONTENTS ...	V-6
II/V-3 SAMPLE BID TABULATION CHECKLIST 	 V-20
II/V-4 SAMPLE BID REVIEW CHECKLIST FOR
CONTRACTOR RESPONSIBILITY 	 V-22
II/VI-1 SAMPLE MONTHLY PROGRESS REPORT	 VI-4
II/VI-2 SAMPLE CHECKLIST FOR STATE CHANGE
ORDER APPROVAL	 VI-9
-vi-
-------
9375.1-5
LIST,OF ACRONYMS AND ABBREVIATIONS
A number of acronyms and abbreviations are used
throughout the text; each is identified in the text, where
possible. To assist the reader in understanding any
acronym or abbreviation that may not be explained, and to
provide a quick reference, a list of acronyms and
abbreviations is included here.
AA	Assistant Administrator
CERCLA Comprehensive Environmental Response, Compensa-
tion, and Liability Act of 1980 (PL 96-510)
CFR	Code of Federal Regulations
COE	U.S. Army Corps of Engineers
EPA	Environmental Protection Agency
FS	Feasibility Study
FY	Fiscal Year
GAD	Grants Administration Division
IFB	Invitation for Bids
MBE	Minority Business Enterprise
NCP	National Oil and Hazardous Substances Pollution
Contingency Plan (40 CFR Part 300)
NPL
National Priorities List
OERR
Office of
Emergency and Remedial Response
OGC
Office of
General Counsel
O&M
Operation
and Maintenance
OMB
Office of
Management and Budget
ORC
Office of
Regional Counsel
OSWER
Office of
Solid Waste and Emergency Response
Volume II/a
-------
QA/QC
RA
RD
KFP
RFQ
RI
ROD
RPM
SBE
SCAP
SOQ
SOW
SPO
WBE
9375.1-5
Quality Assurance/Quality Control
Remedial Action or Regional Administrator
Remedial Design
Request for Proposals
Request for Qualifications
Remedial Investigation
Record of Decision
Remedial Project Manager
Small Business Enterprise
Superfund Comprehensive Accomplishments Plan
Statement of Qualifications
Statement of Work
State Project Officer
Women's Business Enterprise
Volume Il/b
-------
9375.1
2/7/86
INTRODUCTION
-------
9375.1-5
I. INTRODUCTION
Sections 104(c)(3) and 104(d)(1) of the Comprehensive
Environmental Response, Compensation, and Liability Act of
1980 (CERCLA), or Superfund, authorize the use of either a
Cooperative Agreement or a contract as the instrument for
delineating EPA and State responsibilities for remedial
response at a hazardous waste site, for obtaining required
State assurances, and for committing the necessary funds
for remedial response. When a State elects to manage a
remedial response at a site, it enters into a Cooperative
Agreement with EPA. A Superfund Cooperative Agreement
award is the assistance vehicle that transfers funds for
response to the State and documents both EPA and State
responsibilities for the project.
When a Cooperative Agreement is awarded, the recipient
State agency agrees to oversee the project, to ensure that
the general assistance and Superfund program, provisions of
the agreement are met, and to manage the remedial funds.
All Superfund Cooperative Agreements require States (or
political subdivisions thereof) to comply with the provi-
sions of 40 CFR Part 33, Procurement Under Assistance
Agreements, as well as other general and specific program
provisions. This volume presents guidance on this parti-
cular general assistance regulation and its relationship
to State-managed Superfund remedial response activities.
(See Volume I, Chapter III, "Development of Cooperative
Agreement Application Packages," for a full explanation of
other requirements.)
A. SUPERFUND PROCUREMENT CONCERNS
Even if recipients fully satisfy EPA's procurement
requirements, problems may arise that can seriously com-
plicate or delay remedial response. Bid protests, change
orders, and claims are three major areas of concern in "the
State Superfund remedial program.
Bid protests are written complaints filed by a party
or parties with a direct financial interest affected by a
State's procurement action. Change orders are written
orders issued by the State (or its designated agent) to
Volume II/I-l
-------
9375.1-5
the State's'contractor, authorizing an addition to, dele-
tion from, or revision of a subagreement, usually ini-
tiated at the contractor's request. Claims consist of
requests for changes submitted by the State's contractor
(e.g., additional time and/or costs) which initially have
been rejected by the State.
Bid protests, change orders, and claims are actually a
series of problems that can occur at various stages in the
procurement process. EPA, therefore, recommends that
States institute a coordinated program that addresses
these issues at the points at which they are likely to
occur. Further, EPA will offer States assistance in this
effort during remedial response; this will entail the
following:
Prevention of Bid Protests: States must conduct
a biddability/constructability review before the
services of a construction contractor are
procured. The State may choose to conduct this
review itself, may procure the services of an
independent third party, or may request that EPA
perform the review. If EPA agrees to perform a
biddability/constructability review, it will
obtain the services of the U.S. Army Corps of
Engineers (COE). EPA reserves the right to per-
form this review, regardless of the option
selected by the State, when the Agency considers
the remedial action project to be highly complex
or when there are overriding scheduling concerns.
Management of Change Orders: The Cooperative
Agreement funding remedial construction usually
will include a construction contingency fund.
States may not approve a change order that
exceeds 20 percent of the contingency fund, nor
may they approve a change when the aggregate of
change orders exceeds 75 percent of the entire
contingency fund. To do so, they first must ob-
tain EPA approval, which is dependent upon State
performance of administrative and technical
reviews. These reviews will ascertain the effect
that the change order(s) have oh the project
scope of work and schedule, the cost-effective
remedy selected in the Record of Decision for the
site, and the availability of funds to complete
Volume II/I-2
-------
9375.1-5
the response in the event that the change is ini-
tiated. When a remedial response is highly com-
plex or when there are overriding scheduling con-
cerns, EPA will provide the State with technical
assistance in change order management through the
COE or will supply funds to the State to secure
the services of an independent construction
management f i rm.
Claims: EPA shares in the costs associated with
claims at the same percentage rate used for the
remedial action (i.e., 90/10 or 50/50). Before
the Agency will consider funding these costs,
however, EPA requires the State to conduct an
administrative and technical review of each claim.
The following chapters of this manual provide more de-
tailed information on these subjects'.
B. ORGANIZATION OF THIS VOLUME
This manual, Volume II of State Participation in the
Superfund Program, contains six chapters and supplementary
appendices. It is organized as follows:
Chapter I - Introduction, which explains the
rationale for the organization of this volume and
outlines EPA policies designed to assist States
in the prevention and/or resolution of certain
cost and scheduling issues
Chapter II - Regulatory Requirements, which sum-
marizes the requirements of 40 CFR Parts 30 and
33, EPA's regulations governing assistance agree-
ments and procurement under assistance
agreements, and outlines Federal and State roles
Chapter III - Procurement of Engineering Ser-
vices , which explains procurement of architec-
tural and engineering (A/E) services
Chapter IV - Engineering Services During Remedial
Response, which contains a detailed explanation
of the types of services an A/E firm can provide
during all phases of remedial response
Volume II/I-3
-------
9375.1-5
II. PROCUREMENT REQUIREMENTS
-------
9375.1-5
II. PROCUREMENT REQUIREMENTS
This chapter briefly outlines the salient points of
EPA's general regulations that apply to all State procure-
ment under Superfund Cooperative Agreements: 40 CFR Part
300, the National Oil and Hazardous Substances Pollution
Contingency Plan; 40 CFR Part 30, EPA's General Regulation
for Assistance Programs; and 40 CFR Part 33, Procurement
Under Assistance Agreements.* The chapter also addresses
specific procurement topics:
Federal and State roles in procurement
Procurement system certification
Methods available for procuring assistance
Methods for promoting competition
Types of subagreements
Minority, women's, small, and labor surplus area
businesses
Document retention requirements for subagreements
Conflicts of interest and code of conduct
Avoidance of unfair labor practices
States may elect to hav© EPA conduct response activi-
ties at a site; Federal-lead response agreements are
discussed in Chapters IV and V of Volume I. Under
Federal-lead response agreements, EPA allows States to
contribute services as part of their cost-sharing ob-
ligations for remedial activities. If a State exer-
cises this option, it must comply with the provisions
of 40 CFR Parts 30 and 33.
Volume II/II-l
-------
9375.1-5
Cost and price analysis
Profit analysis.
These are addressed in the following sections and apply to
procurement of both engineering and construction services.
A. REGULATIONS APPLICABLE TO PROCUREMENT
A State must meet the requirements of several EPA reg-
ulations when implementing an executed Superfund Coopera-
tive Agreement. These include the following:
National Oil and Hazardous Substances Pollution
Contingency Plan (NCP) (40 CFR Part 300),
General Regulation for Assistance Programs (40
CFR Part 30)
Procurement Under Assistance Agreements (40 CFR
Part 33) .
In addition, specific provisions of other regulations, as
they affect those cited above, apply (e.g., 40 CFR Part
32,	Debarment and Suspension). The State also must con-
sider the applicability of other State and Federal envi-
ronmental and public health statutes, depending on condi-
tions at the site and the cleanup approach to be taken.
Procurement Under Assistance Agreements, 40 CFR Part
33,	is EPA's regulation governing procurement of supplies,
services, and construction by assistance recipients, and,
therefore, applies to States entering into Superfund Co-
operative Agreements with EPA. Key points of this regula-
tion are summarized in Exhibit II/II-l on the following
page. Under this regulation, a State may use its own pro-
curement policies and procedures when conducting procure-
ments using EPA funds if the State first certifies that
its system fulfills the intent of 40 CFR Part 33. If the
Gtate's procurement policies and procedures do not meet
all EPA requirements, the State must use the procedures
set forth in the regulation, must follow the requirements
ir. 4 0 CFR Part 33 Appendix A, and must allow EPA pre-award
review of all proposed procurement actions that will use
IPA. funds.
Volume II/I1-2
-------
9375 1-5
EXHIBIT II/ll-l
SUMMARY OF REQUIREMENTS FOR PROCUREMENT UNDER
ASSISTANCE AGREEMENTS (40 CFR Part 33)
TITLE
SUMMARY OF REQUIREMENT
Recipient Kesponsihi1ity
Submission of Information
Limitation on Subagreement Award
Comnet11 ion
Prof i t
Small, Minority# Women's* and Labor
Surplus Aroa Businesses
Documo itat ion
<
O
jr* Specifications
®
Bonding and Insurance
»—i
»—«
^ Code of Conduct
I
Federal Cost Principles
Prohihitod Types of Subagr ee*nents
Cost and Price Considerations
Lower Tier Subagreements
Sma11 Purchase
Formal Advertising
Competitive Negotiation
Noncompet i tive N»gotlat ion
Requirements for Recipients of
Remedial Action Cooperative
Agreements Under CEHCLA
Subagreement Provisions
Protests
System must ensure that contractors perform in accordance with all applicable requirements
Recipient must inform Award Official of construction subagreements over $10,000 per year
System must consider listed factors in determining contractor responsibility
System must have procurement transaction procedures which provide maximum open and free competition
System procedures must allow only fair and reasonable profits to contractors
System should award a fair share of subagreements to such businesses by following the six
affirmative steps specified
System must require that procurement records and files for purchases over $10,000 Include items
speci f ied
System procedures for establishing specifications must meet the requirements listed
System procurements must meet the specified requirements
System must have a written code or standard of conduct for State officials during subagreement
award
System procedures for determining allowable costs mist meet the specified principles
System may not allow cost-plus-percentage-of-cost (where multiplier includes profit) or percentage-
of-construction-cost types of subagreements
System procedures must allow for analysis of cost and price# as specified
System must require that prime contractors comply with all provisions specified
System small purchase method must meet specified requirements
System procedures relating to formal advertising# including those for bid documents and
subagreement awards# must meet the specified requirements
System procedures for competitive negotiation must meet the specified requirements
System procedures for noncompetitive negotiation must meet the specified requirements
Subpart requires use of formal advertising for remedial action construction procurements unless
the Award Official determines that it is not appropriate (not applicable for remedial planning
or for engineering services)
Subpart includes the clauses that must be contained In subagreements for procurement
Subpart describes procedures to request EPA review of a receipient's protest determination
3.210
3.211
3.220
3.230
3.235
3. 240
3. 250
3.255
3.265
3. 270
3.275
3.285
3.290
3.295
3.305-315
3.405-430
3.505-535
3.605
Subpart E
Subpart F
Subpart G
-------
9375.1-5
B.	FEDERAL AND STATE ROLES IN PROCUREMENT
As previously stated, a Superfund Cooperative Agree-
ment is the mechanism used to document EPA and State
responsibilities and assurances concerning a remedial re-
sponse project. The provisions that are incorporated into
Superfund Cooperative Agreements to delineate these re-
sponsibilities are discussed in Chapter III and Appendix F
of Volume I of this manual. EPA's role during implementa-
tion of the Agreement is one of oversight to ensure that
the State complies with applicable statutes, regulations,
and policies. The Agency also ensures that work conducted
under the Cooperative Agreement meets requirements for
implementing any enforcement or cost recovery actions and
that the State uses the obligated remedial funds for ap-
proved tasks.
The State is responsible for resolving all subagree-
ment and administrative issues associated with procure-
ments under the Cooperative Agreement, since EPA is not a
party to any subagreements (40 CFR 33.245). The State may
award subagreements under the Cooperative Agreement only
to responsible contractors, as defined by 40 CFR 33.220,
and the State must ensure that these contractors perform
in accordance with all provisions of the subagreements (40
CFR 33.210(a) and (b)). In enforcing provisions of such
subagreements, the State may request technical and legal
assistance from EPA, but EPA is not responsible for en-
forcing subagreement provisions (40 CFR 33.210(g)).
C.	PROCUREMENT SYSTEM CERTIFICATION
States should develop their own procurement procedures
and policies to satisfy the minimum requirements of 40 CFR
Part 33, and to certify their procurement procedures to
EPA in accordance with 40 CFR Part 33 Subpart A. If the
State does not have a procurement system that meets the
minimum requirements of 40 CFR Part 33, the State must
follow the requirements in EPA's regulation and give the
Agency the oppor-tunity to review all proposed subagree-
ments and associated procurement actions prior to sub-
agreement award (40 CFR 33.110(b)(2)). States that pro-
vide certification will not receive this level of procure-
ment oversight by EPA; however, EPA reserves the right to
review any State procurement action funded wholly or in
part by EPA. (Additional information on procurement sys-
tem certification can be found in Chapter III of Volume I
of this manual.)
Volume II/I1—4
-------
9375.1-5
States are encouraged to seek advice from EPA at any
stage of any procurement action. EPA staff members are
experienced in the technical, legal, and administrative
aspects of procurement under Superfund and can constitute
an invaluable resource to States. States should consult
with EPA legal staff members prior to awarding subagree-
ments which any party may potentially construe as contro-
versial and which, thus, eventually may result in a pro-
test of the procurement action. This will mitigate the
possibility of a successful bid protest being lodged.
EPA may review and approve the award of subagree-
ments procured under a Cooperative Agreement when States
do not certify their procurement systems (40 CFR Part 33
Subpart A), and may exercise this authority for complex
remedial activities even if a State is self-certified. In
either case, EPA's oversight of a procurement action will
include:
A review of the State's award recommendation for
adequate evidence of the selected engineer's or
construction contractor's capability to perform
the work properly
A review of the State's compliance with guide-
lines for using minority (MBEs) and women's busi-
ness enterprises (WBEs)
Obtaining evidence from the State that the public
solicitation process conforms with Federal,
State, and local procurement regulations
Obtaining evidence from the State that all solic-
itation and/or bidding disputes have been re-
solved, or obtaining details of any unresolved
disputes.
In procurement actions awarding subagreements for con-
struction and/or engineering services, EPA will receive
and may review both the tabulation of bid results and the
selection ranking, respectively, developed by States that
are not self-certified. EPA also may choose to exercise
this authority for complex remedial activities when States
are self-certified.
Even if a State certifies its procurement system, EPA
retains the authority to perform any of the following
activities:
Volume II/I1-5
-------
9375.1-5
Receive all bid or offer tabulations after award
and notify the. Award Official of all construction
subagreement awards over $10,000 (40 CFR 33.211)
Authorize and approve noncompetitive awards under
40 CFR 33.605(d)
Authorize the use of innovative procurement
methods (40 CFR 33.210(h))
Approve the use of a procurement method other
than formal advertising for Superfund remedial
action construction awards (40 CFR 33.910)
Resolve bid protest appeals (40 CFR 33 Subpart G).
EPA also reserves the right to review a State's certified
procurement system or procurement actions under an assis-
tance agreement. If EPA determines that the State is not
following procurement procedures as certified, EPA will
revoke the State's certification and will require it to
follow the procedures of 40 CFR Part 33, including Appen-
dix A; further, EPA may impose sanctions as detailed in 40
CFR Part 30, including termination of the Cooperative
Agreement. States are cautioned to evaluate their pro-
curement systems carefully prior to self-certification to
ensure that they fully comply with 40 CFR Part 33.
A State must certify its system to EPA only once every
two years unless the assistance agreement specifies a
longer project period. If the State previously has pro-
vided its required certification, a responsible official
must complete Part A of the Certification Form, EPA Form
5700-48, indicating the month and year in which this cer-
tification was submitted.
D. METHODS FOR PROCURING ASSISTANCE
Under 40 CFR Part 33, States must award subagreements
using the appropriate method from the four outlined below:
Formal advertising (40 CFR 33.405-33.430), which
requires, at a minimum, that all of the following
conditions be met:
A complete, adequate, and realistic specifi-
cation or purchase description of what is
required
Volume II/II—6
-------
9375.1-5
Two, or more responsible bidders who are
willing and able to compete effectively for
the recipient's business
A procurement that lends itself to the award
of a fixed-price subagreement
The selection of the successful bidder, made
principally on the basis of price (40 CFR
33.405(b)).
Competitive negotiation, the requirements for
which are defined in 40 CFR 33.505-33.525. This
method may be used only if conditions are not
appropriate for formal advertising. (Optional
selection procedures for architectural and engi-
neering (A/E) firms are described in 40 CFR
33.525.)
Small purchase, which may be used only for pro-
curement actions not exceeding $10,000, following
procedures described in 40 CFR 33.305-33.315.
Noncompetitive negotiation, the procedures for
which are described in 40 CFR 33.605 and are used
only if the other three procurement methods are
inappropriate due to the specified reasons.
A State may use procurement methods or procedures
other than those specified only if it first obtains writ-
ten approval from the EPA Award Official. However, a
State may not use a method other than formal advertising
to procure construction services during remedial action
unless it has first obtained concurrence from the EPA
Award Official. (This requirement does not apply to A/E
services during remedial action.) Formal advertising can-
not be waived in the Superfund remedial program on the
basis of a claimed emergency situation since EPA handles
Superfund emergencies under the removal rather than the
remedial program. Furthermore, a declaration of an emer-
gency under State law does not necessarily constitute an
emergency under the EPA Superfund program's criteria.
A summary table of procurement methods and procedures
is presented in Exhibit II/II-2, on the following page.
Volume II/I1—7
-------
9375.1-5
EXHIBIT I I/I1-2
SUMMARY OF PROCUREMENT METHODS AND PROCEDURES
Vvk k f Mfj'i
PROCUREMENT PROCEDURES
." • J • ' \ J sT
Kt , : t i .• • lot
r.*fr«icl* Lcr
•.F-j(re-?I*il Action)
s.t\y in* *z Ic; S-ivinen for
f. \ T's ir.d r«r Iqn
',;ct jor*
•71 a I r'wJi {"•* na .n#- n t
=»:mitc felat Icnn
Han i
.*p«natkn9 An saltan;?
?. 1'Jjm 11J t y/( *18r cue tab 111 ty
°*v {
Advertise for Bids
Hold Pre-Bld Conference
Receive and Open Bids
Evaluate Bids
issue Letter of Intent
Issue Notice of Award
Execute Subagreement
Issue Notice to Proceed (See Exhibit II/V-1 for Detailed Flow Chart of Procurement
Procedures for Construction Services)
Basic Procedures
Issue Request for Proposals
Evaluate Proposals
Develop "Short List" of Best-Qualified Offerors with Acceptable Proposals in the
Competitive Range
Conduct Interviews if Desired
Negotiate with All Offerors Within the Competitive Range
Execute Subagreement
i
l J Pur : v.i*
v	i * iv**
-»n t! * * . '
' Kn k*< I a I
^irvl.-r KO
• ¦><: ?l' rr '¦ ,*i /ifl
ft 11 • In -'\ly It A
.•tnol • ?ourr»
in-.dff |U*.\t C*>irttilfon
oriiclal ApjTi
Optional Procedures for Engineering Services Only
Issue Request for QualifIcations or Refer to Pre-Qualified List
Develop "Short List" of Best-Qualtfied Offerors
Ask for Proposals from the Best-Qualified Offerors
Evaluate Proposals
Negotiate with Offeror with Highest Ranked Proposal
Reach Agreement or Negotiate with Offeror of Next Hiqhest Hanked Proposal
Execute Subagreement (See Exhibit II/III-l for Detailed Flowchart of Procurement
for Engineering Services)
Obtain Price or Rate Quotations from an Adequate Number of Qualified Sources
Make Purchase
Determine Need and Document Reasons for Use arid (let Award Official Approval, if
Necessar y
Negotiate with Single Firm or Individual
Execute Subagreement
*i'»r'•	iv t' i
it*.	jse in the Super fund remedial program.
-------
9375.1-5
E. TYPES OF SUBAGREEMENTS
There are several types of subagreements possible un-
der EPA assistance awards. For the Superfund program, EPA
regulations and procedures specify that some subagreement
types are preferable in certain instances, while some are
not allowed. This section outlines these subagreements
and provides information on their use. In addition to
following these guidelines, States must ensure that all
subcontracts awarded by a contractor comply with 40 CFR
33.295, "Subagreements Awarded by a Contractor."
E.1 Fixed Price Subagreements
Under a fixed price subagreement, the State and its
contractor agree upon a price for the services to be pro-
vided. This price, then, is fixed no matter what the
final costs of the project are. The total cost to the
State is changed only if a change order is negotiated.
A fixed price contract is awarded in instances when a
project scope of work can be defined precisely, such as in
the procurement of construction contractors using bidding
documents that include construction drawings and specifi-
cations. A fixed price subagreement also may be negoti-
ated for other services whose scope can be defined
clearly. For services other than construction, however,
this type of subagreement is used less frequently than the
cost-plus-fixed-fee type (discussed below), primarily due
to the difficulty inherent in defining the scope and limi-
tations of the work to be performed under a fixed fee sub-
agreement. Where a fixed price subagreement is found to
be appropriate, it is the easiest type to administer.
E.2 Cost-Plus-Fixed-Fee Subagreements
The cost-plus-fixed-fee subagreement is the type most
commonly used for obtaining services other than con-
struction on Federally assisted projects. Cost-plus-
fixed-fee subagreements most often are used when it is
difficult to define accurately and clearly the scope and
extent of the work to be performed.
With a cost-plus-fixed-fee subagreement, both a cost
ceiling, made up of direct and indirect costs for the
project, and a fixed contractor fee for the work are es-
tablished. The State, then, pays only for the costs of
the work performed, plus the fixed fee. For example, if
Volume II/I1—9
-------
9375.1-5
the cost ceiling is negotiated at $200, ($100 direct costs
and $100 indirect costs) and the fixed fee is $30, the
State would pay $230 for the project. If the actual
project costs are $80 direct costs and $80 indirect costs,
however, the State would pay $190 for the project (actual
direct and indirect costs plus the full fixed fee of $30).
On the other hand, if project costs are expected to
exceed the agreed-upon ceiling, the contractor must so
inform the State. The State either can complete the
original subagreement after approving the increased cost
ceiling, if increases are found to be justified, or can
terminate the subagreement. For projects where costs are
expected to exceed the ceiling, the contractor is not
required to incur costs in excess of the ceiling, nor to
complete the project as negotiated, unless the State first
negotiates and authorizes a new cost ceiling. The
contractor does not receive an increased fee for projects
where increased costs are for additional work within the
original scope of services. If the additional work is
beyond the scope of the original subagreement and the
contractor is authorized to implement that work, the
contractor may claim an additional fee.
E.3 Percentage of Construction Cost Subaqreements
Used many years ago, this type of subagreement estab-
lished the price of a project as a percentage of the
construction costs. It is not allowed when Federal funds
are involved in a project.
E.4 Cost-Plus-Percentage-of-Cost Subaqreements
This type of contract applies a multiplier, including
a profit, to direct costs of a project to determine total
costs. It is not acceptable when EPA funds are involved
in a project.
E.5 Other Subagreement Types
Other types of subagreements exist. Some are accept-
able for use on EPA-assisted activities, some are less
desireable. States employing firms that previously have
performed EPA-assisted work, particularly under the CERCLA
program, should request assistance from their contractors
in determining appropriate subagreement types; such firms
Volume II/TI-10
-------
9375.1-5
should be familiar with acceptable forms of subagree-
ments. States also may contact the EPA Regional office to
answer questions concerning forms of subagreements.
F. PROMOTING COMPETITION
EPA procurement regulations prohibit the use of prac-
tices that unduly restrict or eliminate competition (40
CFR 33.230). Examples of practices that are considered
unduly restrictive include:
Noncompetitive practices between firms
Organizational conflicts of interest
Unnecessary experience and bonding requirements
State or local laws, ordinances, regulations, or
procedures- that give local or in-State bidders or
proposers preference over other bidders or pro-
posers in evaluating bids or proposals
Placing unreasonable requirements on firms in
order for them to qualify to do business
Unduly restrictive specifications as described by
40 CFR 33.255.
Under the Superfund program. States must take appro-
priate actions to promote competition. These include:
Publishing solicitations in daily newspapers with
significant (State-wide) circulation and in trade
publications (e.g., Engineering News Record, Pub-
lic Works Magazine, Consulting Engineer Magazine)
with regional and national circulations
Encouraging participation by MBEs, WBEs, and
small and labor surplus area businesses by in-
cluding qualified firms on solicitation lists and
by regular notification of Federal, State, and
local agencies that promote the interests of
these businesses
Providing adequate time between the date of the
solicitation and the date on which proposals or
bids will be accepted (for engineering services,
Volume II/II-ll
-------
9375.1-5
this is usually four to six weeks; for construc-
tion projects, this is usually four to eight
weeks, depending on the subagreement size and
complexity)
Developing, implementing, and publishing model
codes of procurement to provide a consistent
basis for obtaining A/E and construction services
Developing and publishing model codes of ethics
to be honored by the State employees who are in-
volved in the procurement process
Developing accurate and complete requests for
qualifications and/or proposals and bidding docu-
ments to be used in obtaining A/E and construc-
tion services
Refraining from noncompetitive (sole-source) pro-
curement, except in instances where an item or
service is available only from a single source,
an emergency requires immediate action, competi-
tion is not adequate (see 4 0 CFR 33.605(c)), or
EPA approval is granted
Not using construction specifications which are
proprietary, exclusionary, or discriminatory in
nature
Whenever possible, using performance specifica-
tions for equipment and materials based upon ac-
cepted, nationally known standards.
Additional actions States may take are maintaining lists
of qualified offerors and bidders who may be sent direct
solicitations to perform A/E and construction services,
and providing trade associations, engineering organiza-
tions, plan reading rooms, etc., with copies of solicita-
tions, requests for proposals, or other bidding
information.
G. MINORITY, WOMEN'S, SMALL, AND LABOR SURPLUS AREA
BUSINESSES
As specified in EPA's procurement regulation, Stares
procuring services under EPA assistance agreements must
take the following six affirmative steps to ensure that
Volume II/II-12
-------
9375.1-5
MBEs, WBEs, and small businesses are used whenever possi-
ble as sources of supplies, construction, and services (40
CFR 33.240):
Place qualified MBEs, WBEs, and small businesses
on solicitation lists
Assure that MBEs, WBEs, and small businesses are
solicited whenever they are potential sources
Divide remedial response tasks into separate sub-
agreements, when economically feasible, to permit
maximum participation by MBEs, WBEs, and small
businesses
Establish delivery schedules, where the require-
ments of the work permit, that encourage competi-
tion by MBEs, WBEs, and small businesses
Use the services and assistance of the Department
of Labor, the Small Business Administration, and
the Minority Business Development Agency of the
U.S. Department of Commerce
Require prime contractors to take the above steps
if they subcontract and to document that they
have fulfilled these steps.
States are encouraged to engage labor surplus area busi-
nesses in Superfund work by using the steps outlined above
and to advertise procurement actions in MBE, WBE, and
small business publications. States also must maintain
records on participation by MBEs, WBEs, and small
businesses.
Further, for MBEs and WBEs, but not for small busi-
nesses, EPA requires all assistance recipients to report
on their utilization of such firms by submitting EPA Form
6005-1 "U.S. EPA Recipient Report on Minority and Women's
Business Utilization" within 15 days after the end of each
Federal fiscal quarter. This form must be submitted re-
gardless of whether the recipient awards a subagreement to
an MBE or WBE during a particular Federal fiscal quarter.
Recipients must comply with this reporting requirement
during each Federal fiscal quarter that they or their con-
tractors award subagreements for the activities or tasks
identified in the assistance agreement.
Volume II/I1-13
-------
9375.1-5
Each EPA program is required to establish an annual
"fair share" objective for MBE and WBE utilization. To
this end, each Region is requested to negotiate a fair
share agreement with each State within its jurisdiction.
When a Superfund Cooperative Agreement is awarded to a
State with which a "fair share" agreement has not been
negotiated, the recipient must agree that it will not
award any subagreements under the Superfund Cooperative
Agreement until it has negotiated a fair share objective
with EPA.
Generally, it is not necessary to negotiate an MBE/WBE
fair share for each assistance agreement. When a dollar
objective is agreed upon for a specific Superfund
Cooperative Agreement, however, that dollar objective
should be stated specifically in the MBE/WBE reporting
provision of the Cooperative Agreement.
Additional details on utilizing MBEs and WBEs for
Superfund State-lead remedial response, and a provision on
the subject to incorporate into Superfund Cooperative
Agreement applications, are found in Chapter III and
Appendix F of Volume I, respectively.
H. DOCUMENTATION
States must maintain detailed documentation on all
procurement actions in accordance with relevant and appli-
cable sections of 40 CFR Parts 30 and 33 and existing EPA
guidance and administrative manuals. Such documentation
includes:
Basis for contractor screening and selection (40
CFR 33.250)
Justification for the procurement method used (40
CFR 33.250)
Justification for any specification or require-
ment that does not encourage free and open com-
petition (40 CFR 33.250)
Justification for the type of subagreement to be
awarded (40 CFR 33.250)
Evidence of advertising (40 CFR 33.250)
Volume II/II—14
-------
9375.1-5
Evidence of solicitation of small, minority, and
disadvantaged business enterprises (40 CFR 33.240)
Actual bids submitted (40 CFR 33.250)
Basis of award, including a copy of the cost or
price analysis and documentation of negotiations
(40 CFR 33.250)
Basis and justification for rejection of any or
all bids (40 CFR 33.250)
Bid tabulations (40 CFR 33.275)
Payment files, including envelopes in which in-
voices were received (40 CFR 30.500(b))
Thorough documentation of all project costs for
possible cost recovery action (40 CFR 30.500);
for multi-site Cooperative Agreements, costs need
to be accounted for by site as well as by assis-
tance agreement number, and by the following re-
medial activities:
Remedial investigation/feasibility study
Remedial design
Remedial action
Operation and maintenance
Protest files (40 CFR 33.1110)
Contracting documents, including the subagree-
ment, work orders, change orders, and related
documentation
Records pertaining to subcontractors used by the
prime contractors (40 CFR 30.500(b))
Correspondence
Logs of telephone and personal conversations
Minutes of meetings, including pre-bid confer-
ences, bid openings, and consultant interviews
Technical and financial progress reports (40 CFR
30.505)
Volume II/II-15
-------
9375.1-5
Records for claims, disputes, and noncompliance
actions (40 CFR 30.500(b))
Other technical documentation such as site visit
reports and any other matters of consequence
relevant to the project, its funding, design, or
performance.
Specific details on document retention and regulatory
references may be found in Appendix U of Volume I. As a
general policy, States should document in writing any
other matters that have to do with procurement and should
maintain such records for review during Federal audit.
These records will enable the State to prove that all
Federal and State requirements have been met in conducting
the procurement action for the remedial response.
The State's contractors must maintain records per-
tinent to the project (40 CFR 30.500(b)), including:
Bid records
Subagreement documents
Work orders received
Change orders and supporting records
Progress reports
Payment vouchers
Stop-work orders
Claims and disputes, with complete back-up
evidence.
The State's prime contractors also must maintain such
records for all subcontractors used on the project.
I. CONFLICTS OF INTEREST AND CODE OF CONDUCT
States must conduct all procurement actions in a man-
ner above reproach, with complete impartiality, and with
preferential treatment to none. This means that no State
employee may solicit or accept any gratuities, gifts,
favors, loans, or anything of monetary value: from anyone
who has obtained, is obtaining, or may possibly seek to
obtain subagreements from the State; from anyone who con-
ducts activities that are regulated by the employee's
State agency; or from anyone who has interests that may be
affected substantially by the performance or non-
performance of the employee's duties. States also should
avoid conflicts in which a State employee has a share in,
Volume II/I 1-16
-------
9375 1-5
or in any manner may possibly benefit from, any subagree-
ments under State administration.
In addition, States must take steps to avoid organiza-
tional conflicts of interest in Superfund procurement ac-
tions. An organizational conflict of interest exists when
the nature of the work to be performed under a subagree-
ment may result in an unfair competitive advantage to a
contractor or may impair the contractor's objectivity in
performing the work. Examples of organizational conflicts
include the following:
A contractor who provides engineering and/or
other technical direction for a system, who de-
termines the system's basic concept, and who su-
pervises its execution by other contractors
should not be in a position to favor his/her own
products or capabilities
A contractor who prepares specifications covering
items to be used in a competitive acquisition
should not be allowed to furnish these items,
either as a prime contractor or as a subcontractor
A contractor who gains access to proprietary in-
formation should agree to protect against un-
authorized use or disclosure of the information
and should refrain from using the information for
any purpose other than that for which it is
intended
A contractor who obtains a subagreement to per-
form a remedial response action under which it
would be paid to clean up a site for which it
ultimately could be found to be liable for the
original hazard
A contractor who, when performing a remedial re-
sponse action, discovers evidence establishing
its own liability for the site.
Situations which constitute conflicts of interest also are
discussed in Volume I, Appendix F.
EPA's policy is to prevent personal or organizational
conflicts of interest or the appearance of such conflicts
of interest in the award and administration of EPA assis-
tance, including subagreements (40 CFR 30.613). To pre-
vent this, EPA's procurement regulation requires that
Volume II/II—17
-------
9375.1-5
States maintain a written code or standard of conduct to
govern the performance of its employees engaged in the
award and/or administration of subagreements supported by
Superfund (40 CFR 33.270). This code must provide that no
State employee shall participate in the selection, award,
or administration of a subagreement supported by Superfund
if a real or apparent conflict of interest exists. Such a
conflict would arise when any State employee, any member
of a State employee's immediate family, or partner of the
employee, have a financial or other interest in the firm
selected for the award; a conflict also would arise if an
organization which may receive or has received a subagree-
ment hires the State employee or any immediate family mem-
ber or partner of the employee. While State employees may
neither solicit nor accept gratuities, favors, nor any-
thing of monetary value from contractors, States may set
rules to determine situations where financial interest is
not considered to be substantial or a gift is an unsolic-
ited item of nominal intrinsic value.
At a minimum, States also must incorporate the follow-
ing provisions, or their equivalents, into all subagree-
ments awarded using Superfund monies (to be included in
revisions to 40 CFR 33.1030):
The contractor shall not provide data generated
or otherwise obtained in the performance of his
responsibilities under a subagreement to any
party other than State or Federal agencies and
their authorized agents.
The contractor shall not accept employment from
any party other than State or Federal agencies
for work directly related to the site(s) covered
under a subagreement for a period of three years
from termination of the subagreement, or until
any cost recovery action related to the site(s)
is completed, whichever is longer, unless he has
received a written release from this restriction
from the contracting State agency, which includes
an EPA concurrence.
The contractor shall provide witnesses and docu-
mentation of activities performed and costs in-
curred under a subagreement upon request to State
or Federal agencies during the period of three
years from termination of the subagreement, or
until any cost recovery action related to the
Volume II/II-18
-------
9375.1-5
site(s) ,is completed, whichever is longer. The
contractor shall be entitled to fair and just
compensation for any such activities performed.
The contractor agrees to notify the contracting
officer of any actual, apparent, or potential
conflict of interest with regard to any individ-
ual working on a work assignment or having access
to information regarding the subagreement. Noti-
fication of any conflict of interest shall in-
clude both organizational conflicts of interest
and personal conflicts of interest (which are
defined as the same types of relationships as
organizational conflicts of interest, but appli-
cable to an individual). In the event that a
personal conflict of interest exists, the indi-
vidual who is affected shall be disqualified from
taking part in any way in the performance of the
assigned work that created the conflict of inter-
est situation.
Additional discussion of conflict of interest provisions
can be found in Appendix F of Volume I.
J. UNFAIR LABOR PRACTICES
Unfair labor practices are illegal and prohibited un-
der Superfund. Examples of unfair labor practices include
kickbacks from subagreement award and antitrust violations.
Kickbacks are payments made to influence the award of
subagreements. The principal deterrent to kickbacks is
the Anti-Kickback Act (41 U.S.C. 51-54), which:
Prohibits payments by, or on behalf of, a subcon-
tractor in any tier under any Federally funded,
negotiated subagreement, as an inducement to
award a subcontract
Provides for recovery of payments by court action
or by withholding compensation otherwise due the
subcontractor
Imposes criminal penalties on any person who
knowingly makes or receives these payments.
Volume II/II-19
-------
9375.1-5
Antitrust laws are intended to ensure that markets
operate competitively; violations of antitrust laws
include:
The existence of industry price lists or price
agreements
Simultaneous price increases or "follow-the-
leader" pricing
Rotation of bids or proposals so that each com-
petitor takes a turn in the sequence as low bid-
der , or so that certain competitors bid low only
on some sizes of subagreements and high on others
Division of the market so that certain competi-
tors bid low only for subagreements in certain
geographical areas or on certain projects, and
bid high on other projects
Establishment by competitors of a collusive pric-
ing system
The filing of a joint bid or offer by two or more
competitors when at least one of the competitors
has sufficient technical capability and produc-
tive capacity for subagreement performance
Any evidence of direct collusion among competi-
tors, such as the appearance of identical calcu-
lations or spelling errors in two or more bids or
offers.
Each contractor must include in its bid or proposal a cer-
tification of independent price determination in accor-
dance with the revisions to 40 CFR 33.420. This document
certifies that no collusion, as defined by Federal and
State antitrust laws, occurred during bid preparation. In
addition, the State may terminate a subagreement if it is
discovered that a person or agency was employed or re-
tained by the contractor solely to secure the subagreement
for a commission, percentage, brokerage, or contingent
fee. The State also may terminate the subagreement if the
contractor, by offering or giving gratuities (in the form
of entertainment, gifts, or otherwise), tries to elicit
from any employee of the State or EPA aid in obtaining
favorable treatment.
Volume II/I1-20
-------
9375.1-5
K. COST AND PRICE ANALYSIS
States must conduct a cost or price analysis, as ap-
propriate, on every procurement action, including change
orders to existing subagreements. Where the State con-
ducts a cost or price analysis, contractors and subcon-
tractors must submit supporting data to the State. This
information must be displayed on EPA Form 5700-41, "Cost
and Price Summary" (see Exhibit II/II-3, on the following
pages), or in another format which provides similar
information.
This section provides a further discussion of cost and
price analyses.
K. 1 Cost Analysis
The State must conduct a cost analysis on all negoti-
ated subagreements estimated to exceed $10,000, and on all
negotiated change orders (40 CFR 33.290).
A cost analysis is defined as the review and evalua-
tion of each cost element to determine the reasonableness,
allocability, and allowability of the cost. This evalua-
tion includes a comparison of the offeror's current cost
estimates with: costs previously incurred by the offeror,
the offeror's last prior cost estimate for similar items,
current cost estimates from the State or other sources,
and prior estimates of historical costs from other con-
tractors for the same or similar items.
K.2 Price Analysis
A price analysis is required an all formally adver-
tised procurements estimated to exceed $10,000 if there
are fewer than three bidders. If there are three or more
bidders on a formally advertised procurement, the State
can assume, unless evidence demonstrates otherwise, that
adequate price competition has taken place.
A price analysis is the process of evaluating a con-
tractor's prospective price for a project, without regard
to the contractor's separate cost elements and proposed
profit. Price analysis determines the reasonableness of
the proposed subagreement price based on adequate price
competition, previous experience with similar work, estab-
lished catalog or market price, and law or regulation.
Volume II/I1-21
-------
EXHIBIT II/II-3
COST AND PRICE SUMMARY
9375.1-5
&EPA
COST OR PRICE SUMMARY
/See accompanying instructions before completing this form)
form Approrod
OMB No. 2030-0011
Approval oipmt 10-31-86
PART I — GENERAL
1 RECIPIENT
2. ASSISTANCE IDENTIFICATION NO
3 NAME OF CONTRACTOR OR SUBCONTRACTOR
4 DATE Of PROPOSAL
5 AODRESS OF CONTRACTOR OR SUBCONTRACTOR flneludo ZIP CoOol
TELEPHONE NUMBER flneluOt Am CoOt)
6 TYPE OF SERVICE TO BE FURNISHED
PART II - COST SUMMARY
7 DIRECT LABOR fSp**y t*6or cfgot—ii
ESTIMATED
HOURS
HOURLY
RATI
ESTIMATED
COST
TOTALS


•
•





















DIRECT LABOR TOTAL



•
6 INDIRECT COSTS (Soocfty «r»d/r#cr cost pooU)
RATE
i BASE -
ESTIMATED
COST



•
•








INDIRECT COSTS TOTAL



•
9 OTHER DIRECT COSTS

« travel
ESTIMATED
COST
(11 TRANSPORTATION
$
(2) PER DIEM
•



•
b EQUIPMENT. MATERIALS. SUPPUES fSfMCfty C9l*90f*S)
QTY
COST
ESTIMATED
COST


•
•












EQUIPMENT SUBTOTAL



C SUBCONTRACTS
ESTIMATED
COST

•




SUBCONTRACTS SUBTOTAL

1
<3 OTHER cMgotft!


ESTIMATED
COST



•




OTMER SUBTOTAL


•

• OTHER DIRECT COSTS TOTAL



•
10 TOTAL ESTIMATED COST

•
U PROfrT
•
12 TOTAL PRtCP
•
EPA Form 6700-41 |R»v 4-B4) Previous Miltoni may b* usad until lupplm no uhauttad
Volume I I/I1-22
-------
EXHIBIT II/I1-3 (Continued)
9375.1-5
PART III - PRICE SUMMARY
13 COMPETITOR'S CATALOG LISTINGS. IN-HOUSE ESTIMATES. PRIOR QUOTES
Undkou bear* for prtto tompatnon)
MARKET
PRICEfS)
PROPOSED
PRICE

























t
	PART IV - CMf HMfoPONg
14 CONTRACTOR	
14a. HAS A FEDERAL AG ENCY OR A FEDERALLY CERTIFIED STATE OR LOCAL AGENCY PERFORMED ANY REVIEW OF YOUR ACCOUNTS OR
RECOROS IN CONNECTION WITH ANY OTHER FEDERAL ASSISTANCE AGREEMENT OR CONTRACT WITHIN THE PAST 12 MONTHS?
~ YES ~ NO (If "Y»t " giro nmmt. oddriiM. tnd tohfihont numbmf of nviowtng otfiea
14b. THIS SUMMARY CONFORMS WITH THE FOLLOWING COST PRINCIPLES
14c This proposal n submitted for um in connection with and in reaponae to.
(11
This is to canity to tha bast of my knowledge and belief that the coat and pricing data summarized herein are
complete, current, and accurate as of
13) DATE
I further certify that a financial management capability exists to fully and accurately account lor tha financial transections under this
protect. 1 further certify that 1 understand that tha subegreamem price may be subfect to downward renegotiation and/or recoupment
where the ebove cost and pricing data have been determined, aa a result of audit, not to have bean complete, current and accurate aa of the
date above
(31 TITLE OF PROPOSER
SIGNATURE OF REVIEWER
DATE OF EXECUTION
15 RECIPIENT REVIEWER
I certify that 1 have reviewed the coat/price summery set forth herein and the proposed costa/price appear acceptable for aubegreement
award.
(3/ TITLE OF PROPOSER
SIGNATURE OF REVIEWER
DATE OF EXECUTION
16 EPA REVIEWER
(3) TITLE OF PROPOSER
SIGNATURE OF REVIEWER
DATE OF EXECUTION
EPA Form 6700-41 (Rev. 4-84)

Page 2 of 5
Volume II/I1-23
-------
9375.1-5
L. PROFIT ANALYSIS
The State must ensure that it pays only a fair and
reasonable profit to its contractors. In a procurement
action where there is no competition (e.g., a change or-
der) and where price is based on a cost analysis (e.g.,
competitive and noncompetitive negotiation), the State
must negotiate profit as a separate element of cost. To
determine a reasonable profit, the State must consider the
complexity of the work to be performed, the risk borne by
the contractor, the contractor's investment, the level of
subcontracting, the contractor's past performance record,
and industry profit rates in the surrounding geographical
area for similar work.
*****
Within this framework, the State must procure contrac-
tors to conduct remedial response at a site. The specific
procedures that it will employ depend on whether the State
is seeking to acquire the services of an A/E firm to con-
duct remedial planning activities or construction over-
sight, or to obtain the services of a construction firm to
implement the remedial action. Because procedures differ,
they are discussed in separate chapters of this document.
See Chapter III - Procurement of Engineering Services for
procedures appropriate for A/E firms, and Chapter V -
Procurement of Construction Services for procedures to be
used when obtaining the services of a construction firm.
Volume II/I1-24
-------
9375.1-5
III. PROCUREMENT OF ENGINEERING SERVICES
-------
9375.1-5
III. PROCUREMENT OF ENGINEERING SERVICES
This chapter outlines the general requirements for
procuring the services of an architectural and engineering
(A/E) firm during any phase of remedial response. States
may procure the services of A/E firms either through for-
mal advertising or competitive negotiation. Formal adver-
tising, in certain circumstances, is not always a prac-
tical approach, and thus competitive negotiation, which
results in a cost-plus-fixed-fee contract, often is used.
This chapter provides specific procedures for the two
methods of competitive negotiation: the standard method
and the optional method. In addition, it contains gui-
dance that States may use to expedite procurement of A/E
firms within the framework provided by either of the two
competitive negotiation methods specifically described.
A. GENERAL REQUIREMENTS FOR PROCURING ENGINEERING SERVICES
States may employ the services of reputable A/E firms
at almost any stage of remedial response. EPA's regula-
tion governing procurement under assistance agreements, 40
CFR Part 33, allows the use of either formal advertising
or competitive negotiation for obtaining an A/E firm.
Further, the regulation provides two methods of competi-
tive negotiation for obtaining such engineering services;
either method may be used under Superfund Cooperative
Agreements. The "standard method" involves selection of
an engineering firm, taking into account both technical
capabilities and the proposed cost to complete the work,
and is discussed in Section B below. Selection using the
"optional method" is based primarily upon the firm's tech-
nical capabilities, and is discussed in Section C.
Before the State initiates either procurement method,
however,- it is essential that the State perform a compre-
hensive evaluation of its needs to determine the appro-
priate procurement method, thus avoiding unnecessary
delays. States should take the following steps to develop
basic information for the procurement process:
Determine, in general terms, the need, purpose,
and objectives of the desired engineering services
Volume II/III-1
-------
9375.1-5
Identify the project scope of work
Set the timetable for procurement and performance
of A/E services
Identify unique project considerations
Determine the total project budget.
Once the State has developed this .information, it can
begin the procurement process.
If the State is using the standard competitive nego-
tiation method, as defined by 40 CFR 33.505-33.520, the
first procurement action is to issue a Request for
Proposals (RFP). The RFP describes the project, lists
proposal evaluation criteria and their relative impor-
tance, and gives the deadline and location for submission
of proposals from interested firms. The aspiring A/E con-
tractor's response to an RFP is a proposal detailing both
the methods that it will use to perform the work required
for the project and the estimated costs for these services.
If the State is using the optional method of procure-
ment, as defined by 40 CFR 33.525, the first procurement
action is the issuance of a Request for Statements of
Qualifications (RFQ). The RFQ describes the project and
the proposed scope of services, explains the evaluation
criteria to be used and their relative importance,
provides the names of persons that firms can contact to
answer questions, and specifies the deadline and location
for submission of the statements of qualifications
(SOQs). In responding to an RFQ, a firm supplies general
information about its qualifications to perform the pro-
posed project and its experience in handling similar proj-
ects; it does not address specific scopes of work or costs
to perform the project.
A more detailed discussion of these two methods for
procuring A/E services under the Superfund program is
provided in the following two sections.
B. STANDARD METHOD OF COMPETITIVE NEGOTIATION
Under the standard method of competitive negotiation
for procuring A/E services, the State gives public notice
of its intent to hire an A/E firm by publishing an RFP.
It then evaluates the proposals received, negotiates with
Volume II/III-2
-------
9375.1-5
offerors judged to be within the competitive range to ob-
tain their best and final offers, and awards the subagree-
ment to the firm determined by the evaluation to be the
most advantageous to the State. Exhibit II/III-l, on the
following page, is a graphic representation of the process
for obtaining A/E services by the standard method, as
defined by 40 CFR 33.505-33.520.
B.1 Request For Proposals
Proper development of the State's RFP is key to suc-
cessfully soliciting engineering services. It is neces-
sary that the State prepare an accurate and complete RFP
that effectively addresses the issues specific to the
project. Thus, the proposals received should be respon-
sive to the State's needs. The RFP must be in writing,
must contain sufficient information to enable a prospec-
tive offeror to prepare a proposal, must present all
evaluation criteria and the relative importance attached
to each, and must clearly state the deadline and location
to submit proposals (40 CFR 33.510(c)).
When soliciting proposals, the State should:
Accurately and completely describe the proposed
project and engineering services required
Provide project schedule requirements
Describe any unique project requirements
Include the names of persons to contact with
questions on the selection process
Determine the required content of the proposals,
including, for example:
The availability of personnel, equipment,
and facilities needed to complete ..he work
Recommendations and opinions from previous
clients, as they relate to the specific
project under consideration
Provide a detailed cost estimate for the project.
State solicitations also should contain a minority and
women's business enterprise (MBE/WBE) utilization plan.
Volume II/III-3
-------
9375.1-5
EXHIBIT ll/lll-l
STANDARD METHOD FOR PROCUREMENT OF ENGINEERING SERVICES
<
o
a>
I
>*»•
YES
NEGOTIATE WITH
OFFERORS TO OBTAIN
"BEST AND FNAL"
OFFERS
40 CFR 33.520(1)

NO


'

EPA REVIEW

OFAWARO

RECOfcWENOAT ION

40 CFR 33.110(b)(2)

NO
RESOLVE

ISSUES

-------
9375.1-5
B.2 Evaluating Proposals
Engineering firms expressing an interest in performing
the work will offer proposals that, at a minimum, include
a letter of interest, a statement that demonstrates the
firm's understanding of the project, evidence of the
firm's financial stability and its ability to perform the
work, and a detailed cost proposal. The State then will
use the evaluation criteria included in the RFP to analyze
the submissions and determine the best proposal.
Using the standard method of procurement, the State
may take either of two courses of action. First, it may
begin negotiations with those firms within the competitive
range best able to perform the work, to obtain their best
and final cost proposal, as described in the following
section, or, if the RFP states that the award may be based
on initial offers alone, it may accept the best proposal
without further negotiation. During the evaluation proce-
dure, the State must consult the most current EPA "Master
List of Debarred, Suspended, and Voluntarily Excluded
Persons" (40 CFR 32.400) to ensure that the firms sub-
mitting proposals are not prohibited by EPA from partici-
pation in the assistance program. The Master List is
updated weekly and is available from EPA Office of
Regional Counsel in each Region.
B.3 Negotiation and Subaqreement Award
If the State does not choose a firm based solely on
the original proposals submitted, the State begins nego-
tiations with the firms within the competitive range to
obtain best and final offers. If any single offeror is
allowed to alter its proposal, all best-qualified offerors
within the competitive range must be afforded the same
opportunity (40 CFR 33.520(a)). At no time during nego-
tiations may the State disclose the identities of com-
peting offerors. The State also must not reveal any in-
formation contained within competing proposals (40 CFR
33.520(a)). To bring discussions to an end, the State
must establish a common cut-off date which allows the
offerors ample time to prepare and submit best and final
offers.
The State then evaluates the final offers and decides
which proposal is most advantageous (40 CFR 33.520(b)).
Price and other evaluation criteria in the RFP, including
effective utilization of MBEs and WBEs, must be considered
Volume II/III-5
-------
9375.1-5
in making this determination. All factors used in deter-
mining the best-qualified offers within the competitive
range must be documented fully. The firm chosen to
receive the subagreement award must be notified imme-
diately in writing, and all unsuccessful offerors must be
informed of their rejection (40 CFR 33.520).
C. OPTIONAL METHOD OF COMPETITIVE NEGOTIATION
States may procure engineering services through a
process by which the most highly qualified firms are
located and requested to submit technical proposals. The
State then selects the best technical proposal and nego-
tiates with that offeror for fair and reasonable compen-
sation for a specific scope of work (40 CFR 33.525).
Should the State and offeror of the best proposal not be
able to reach agreement, negotiations with that offeror
must be terminated and the State negotiates with the
offeror of the second-best technical proposal. This
process continues until the State reaches agreement on the
scope of services and corresponding compensation with a
qualified offeror submitting an acceptable technical
proposal.
Exhibit II/II1-2, on the following page, is a graphic
representation of the optional method for obtaining en-
gineering services. The significant difference between
the optional and standard methods for procuring engineer-
ing services is that, using the standard method, as
defined by regulation, the State evaluates offerors taking
price into consideration prior to selecting the respon-
sible offeror whose proposal is determined to be the most
advantageous to the State; using the optional method, the
State selects the best technical proposal and then
negotiates a price for the work.
C.1 Soliciting Statements of Qualifications
The optional method selection process begins with the
State issuing a request to firms to submit SOQs and
summaries of their experience in performing engineering
services related to a specific project. The request may
be made through a public solicitation (40 CFR 33.510) or
by direct requests to engineering firms that have been
Volume II/II1—6
-------
*375.1—5
EXHIBIT II/III-2
OPTIONAL METHOD FOR PROCUREMENT OF ENGINEERING SERVICES
DEVELOP PRELIMINARY
PROJECT SCOPE OF
WORK. SCHEDULE,
AND BUDGET
YE 8
DEVELOP "SHORT UST*
OF MOST QUALIFIED
FIRMS AND REQUEST
TECHNICAL PROPOSALS
40 CF R 33 525(c)
PUBUCLY SOUCfT
STATEMENTS OF
QUALIFICATIONS
FROM NTERESTED
ENGINEERING FtRMS
EVALUATE
STATEMENTS
OF
QUALIFICATIONS
40 CFR 33 525(C)
EVALUATE
TECHNICAL
PROPOSALS
OPEN CONTRACT
NEGOTIATIONS
WTH OFFEROR OF
NEXT HK3HEST
RANKED PROPOSAL
40 CFR 33 525(1)
TEfMNATE
NEGOTIATIONS
WTTH OFFEROR
40 CFR 33 525(0
DCTERMME
BEST
TECHNICAL
PROPOSAL
40 CFR 33 525(d)
BEGIN CONTRACT
NEGOTIATIONS WITH
OFFEROR OF
BEST PROPOSAL
40 CFR 33 525(»)
SCOOT COMPREHENSIVE
COST PROPOSAL FROM
OFFEROR UNDER
CONTRACT
NEGOTIATIONS
40 CFR 33.525 (t)
tCGOTlATE DETAILED
SCOPE OF WORK
TlkC OF PERFORMANCE
AND COMPENSATION
40 CFR 33 525(«)
EXECUTE


	 H SUBAGTCEMENT P S
. CERTIFIED? >¦





NO



YES






<
f




EPA


NO EPA N.
REVIEW
RESOLVE
^ ADOOTWAI 9 ^"S*. ^
OF AWARD
ISSUES


RECOMMENDATION




40CFR33 110(b)(2)
-------
9375.1-5
identified by the State (prequalified) in the disciplines
required (40 CFR 33.230(c)). States that maintain lists
of prequalified engineering firms are required to update
their lists at least every six months, to review and act
on each request for prequalification made more than thirty
days before the closing date for receipt of proposals, and
to give adequate public notice of their prequalification
procedures in accordance with the public notice require-
ments of 40 CFR 33.510.
State RFQs must include at least the following items:
The requested scope of services
A clear explanation of the criteria to be used in
evaluating the SOQs and the relative importance
of each criterion
An MBE/WBE utilization plan
The deadline (date and time) for submitting SOQs
The names of persons to contact with questions.
The State's criteria for evaluating and ranking offerors
may include:
Education, experience, and expertise of the
offeror's principals and key staff members
The offeror's general experience, financial
stability, and history of performance
Availability of personnel, equipment, and
facilities needed to complete the work
Plans for MBE/WBE utilization
Recommendations and opinions from each offeror's
previous clients as these relate to the specific
project under consideration.
Other criteria may be used, depending upon the specific
requirements of the project.
Volume II/II1-8
-------
9375.1-5
C.2 Evaluating Statements of Qualifications
The State must evaluate the responses received to
eliminate all respondents who are obviously unqualified or
otherwise incapable of performing the required work. The
State then must develop a "short list" that includes three
or more of the most highly qualified offerors, based upon
the evaluation criteria listed in the RFQ. In developing
this list, the State must consult the most recent EPA
"Master List of Debarred, Suspended, and Voluntarily
Excluded Persons" (40 CFR 32.400) to ensure that the firms
selected are not excluded from the assistance program.
The Master List is updated weekly and is available from
the Office of Regional Counsel in each EPA Region.
Ranking of the firms must be based on qualifications,
anticipated quality of work, and prospects for satisfac-
tory completion of the project. It also should ensure
that each offeror's submittals meet the criteria set forth
in the RFQ.
C.3 Soliciting and Evaluating Proposals
After selecting the most qualified offerors, States
must request technical proposals from the offerors and
must inform them of the evaluation criteria the State will
use to rank the technical proposals (40 CFR 33.525(c)).
The RFP should specify that each proposal submitted must
define the offeror's intended concept and approach to the
planning, organization, and management of the project.
Upon receipt, the technical proposals are evaluated care-
fully. At this point, the State may wish to meet with the
short-listed offerors individually to obtain additional
information to be used in determining which offeror is
most qualified. Once the State has made its determina-
tion, it must notify in writing the offeror of the best
technical proposal (40 CFR 33.525(d)) and then may begin
subagreement negotiation.
C.4 Negotiation and Award of Subagreement
After the offeror of the best technical proposal is
notified, the State may initiate negotiations to develop
the details of the scope of work and corresponding compen-
sation. Specific elements that must be established during
these negotiations include:
Volume II/II1-9
-------
9375.1-5
Project schedule
Manpower requirements
Level of effort
Scope of services and deliverables
Areas of responsibility and liability
Fee structure, amount of compensation, and method
of payment.
The offeror must submit a comprehensive cost proposal
addressing the above items in detail, to be used as the
basis for the State's cost analysis and negotiations.
During the negotiation process, the State and offeror must
reach a complete and mutual understanding of the scope of
professional services to be provided and the level of per-
formance desired. The negotiation process offers both
parties the opportunity to refine, amend, and clearly
define the services to be rendered for the compensation to
be paid, as well as the areas of responsibility and
liability for those services.
When the State and the offeror agree on the scope of
work and adequate compensation, the State may execute a
subagreement and issue a notice to proceed with the work,
provided the State has certified its procurement system to
EPA. (See Chapter II for subsequent action when States
are not self-certified.) If it is not possible for the
State and offeror to reach an agreement, the State must
terminate negotiations with that offeror and reinstitute
the process with the offeror of the next-best technical
proposal (40 CFR 33.525(f)). The procedure is repeated
until an agreement is reached.
D. EXPEDITING PROCUREMENT OF ENGINEERING SERVICES
The State may choose to use different firms for con-
ducting remedial investigation/feasibility study the
(RI/FS) and overseeing the engineering design/construc-
tion, thus performing two separate procurements. This
situation, however, may delay the entire remedial response
process at the site. To minimize such delays, the State
may include the RI/FS and engineering design/construction
oversight within a single procurement. To leave this
option open, the State's original RFP for engineering
Volume II/III-10
-------
9375.1-5
services must indicate that the RI/FS is the initial
activity that will be authorized and that the State,
through a separate notice to proceed, may execute an
option for design and construction oversight services,
subject to the availability of funding to amend the
Cooperative Agreement and the negotiation of an acceptable
cost. In this manner, the State could choose to use a
single A/E firm if the design and construction project(s)
is funded and the firm is able to perform the work. This
method of procurement should improve the continuity of
technical activities, accelerate project schedules, and
reduce State administrative costs associated with
procuring technical services.
When undertaking the lead for remedial planning the
State also is encouraged to expedite necessary procurement
within the framework presented in this chapter. Under
& normal- circumstances, procurement actions for remedial
planning may require several months to complete and thus
may delay the remedial response. Exhibit II/II1-3, on the
following page, describes four suggested alternatives for
expediting the initiation of remedial planning. These
should be considered on a case-by-case basis, as appro-
priate. Additional information on expediting procurement
is provided in "Guidance for State Contracting of Remedial
Planning Activities," Office of Solid Waste and Emergency
Response, February 22, 1983, and "Class Deviation From
40 CFR 33.510 and 33.515 for Certain Activities Conducted
Under the Authority of CERCLA," Grants Administration
Division, November 18, 1983.
*****
The next chapter — Chapter IV - Engineering Services
During Remedial Response — presents a brief description
of the various services that an A/E firm can provide to
the State during remedial response activities at uncon-
trolled hazardous waste sites, both in the course of reme-
dial planning and during the remedial action phas»3.
Volume II/III-ll
-------
9375.1-5
EXHIBIT II/III-3
METHODS FOR EXPEDITING PROCUREMENT*
Type
Summary
Options Contract
for Site Remedial
Planning Activities
The State includes both remedial planning and
remedial action in the initial Cooperative
Agreement application. Following completion
of the RI/FS and selection of a remedy,
remedial design and remedial action are funded
by amendment. The State's request for
proposals {or similar documents) for
engineering services also covers all remedial
phases, but indicates that only RI/FS
activities will be funded, with an option to
conduct the design and remedial action
engineering services subject to the
availability of funds.
Pre-Award Procurement
The State starts procurement activities such
as issuing requests for proposals,
negotiations, and selection of a qualified
firm before the award of the Cooperative
Agreement. A procurement subagreement then
can be signed immediately after the award of
funds. State personnel costs prior to award
are not allowable; however, these costs should
not be significant.
Procurement for
Multiple Site Planning
States with numerous sites and available
funding for cost-sharing may issue a level-of-
effort type subagreement similar to EPA's
remedial contracts. Once in place, site
planning activities could be started
immediately following the award of an
individual Cooperative Agreement, without the
need for site-specific procurement actions.
Procurement Using
Prequalifications
The State compiles a list of available
contractors by requesting qualifications from
firms capable of performing remedial planning
activities. The list of prequalified firms
then is used to solicit site-specific
proposals. However, prequalification
procedures must ensure adequate competition.
*A11 methods shown must be consistent with EPA'i procurement
regulation, 40 CFR Part 33.
Volume II/III-12
-------
9375.1-5
IV. ENGINEERING SERVICES DURING REMEDIAL RESPONSE
-------
9375.1-5
IV. ENGINEERING SERVICES DURING REMEDIAL RESPONSE
Architectural and engineering (A/E) firms can provide
assistance to States during all phases of remedial re-
sponse. Traditionally, A/E firms have conducted the reme-
dial investigation/feasibility study (RI/FS) and the reme-
dial design (RD). In addition, the State can utilize A/E
firms to provide other types of assistance, including con-
ducting biddability/constructability reviews of designs
developed by other A/E firms, assisting in the procurement
of a construction contractor, managing the construction,
managing change orders, and assisting the State in resolv-
ing claims. In the latter case, if there is an apparant
conflict of interest between the planning/design of a
remedy and its construction, however, the A/E firm that
developed the design cannot provide assistance during
claims negotiation. Exhibit II/IV-1, on the following
page, presents a graphic representation of points during
remedial response at which engineering services may be
used.
Since A/E firms can provide such varied services, this
chapter discusses the nature of the assistance that they
can lend to States throughout remedial response. Specifi-
cally, the sections below consider the following subjects:
Section A - RI/FS
Section B - RD
Section C - Biddability and constructability
reviews
Section D - Bid phase services
Section E - Construction oversight services
Section F - Claims
Section G - Operation and maintenance (O&M).
To provide additional assistance, each section includes a
generalized scope of work for the types of activities that
an A/E firm may be requested to perform at each of these
Volume II/IV-l
-------
9375.1-5
EXHIBIT ll/IV-1
TYPES OF ENGINEERING SERVICES TYPICALLY USED
DURING REMEDIAL RESPONSE ACTIVITIES
-------
9375.1-5
points in remedial response. Guidance specific to the
above subjects can be found in relevant portions of the
following documents: Guidance on Remedial Investigations
Under CERCLA, Office of Emergency and Remedial Response
(OERR), June 1985; Guidance on Feasibility Studies Under
CERCLA, OERR, June 1985; and Superfund Remedial Design and
Remedial Action Guidance, OERR, February 1985.
In using this chapter. States are reminded that A/E
firms are only one option available to perform the types
of work described in Sections C through F. Alternatively,
at various points States may choose either to perform the
work themselves, to seek assistance from EPA which will
obtain the services of the U.S. Army Corps of Engineers
(COE), or to utilize an independent management consulting
firm to accomplish this work. Since A/E firms are such a
valuable resource, however, this chapter considers their
services separately. Other options cited above and tech-
nical requirements for the aspects of remedial response
detailed below in Sections C through F are discussed in
Chapter V, which describes in full the construction firm
procurement process.
A. REMEDIAL INVESTIGATION/FEASIBILITY STUDY
After an A/E firm is hired and before the RI/FS is
initiated, a detailed scope of work for the project is
prepared. The scope of work describes the current
situation at the site and includes a compilation of all
available existing information. It also includes plans
for quality assurance/quality control (QA/'QC), health and
safety, sampling and analysis, site management, data
management, and community relations.
Once the scope of work is approved, the RI is per-
formed to define the problems and dangers associated with
the sitie. The site is mapped and investigated thoroughly
by sampling the area, ground water, surface water, soils,
vegetation, animals, and other appropriate elements to
determine the extent of the hazard. The wastes present in
drums, tanks, pits, lagoons, or other locations or con-
tainers also are characterized by sampling and analysis.
After the data are gathered, the danger presented by the
site is assessed and treatability studies, in the form of
pilot or bench scale treatment processes, are performed to
determine an appropriate remedial action to control or
remove the hazard. All data are gathered and analyzed,
and the RI report is issued.
Volume II/IV-3
-------
9375.1-5
The FS identifies and analyzes the various remedial
technologies available to eliminate the hazards associated
with the site. Alternatives are evaluated for their ef-
fects upon, and ability to protect, the environment and
public health. In addition, the alternatives are examined
in terms of the regulations and procedures established by
each governmental agency controlling site remediation and
a cost analysis of each alternative is performed. The
results of these investigations and studies are used by
the State and EPA to develop the Record of Decision (ROD)
for the site. They also are used by the A/E firm to pre-
pare a Pre-design Report which includes conceptual site
plans, outline specifications, and a preliminary schedule
and projected cost estimate for remedial action.
Activities that an A/E firm may be called upon to per-
form during the RI/FS may vary considerably, depending
upon the conditions at the site. They may include the
following:
Compile existing site information
Prepare project operations plans, including the
health and safety, sampling and analysis, site
management, and community relations plans
Incorporate the existing information and project
operations plans into the detailed scope of work
for the RI/FS
Prepare complete and detailed site maps
Characterize wastes present on-site in drums,
tanks, pits, lagoons, etc.
Conduct a sampling and analysis program to define
the extent of the contamination present at the
site and its environs
Perform an endangerment assessment
Perform pilot and bench scale treatability studies
Issue an RI Report
Identify available remedial technology alternatives
Volume II/IV-4
-------
9375.1-5
Analyze alternatives for technical feasibility,
exposure and risk, environmental effects, compli-
ance with government regulations, and cost
Issue an FS Report
Assist in preparation of the ROD
Prepare the Pre-Design Report, including concep-
tual site plans, outline specifications, prelimi-
nary schedule, and projected cost estimates.
A model SOW for an RI/FS and additional discussion can be
found in Appendix E of Volume I of this manual. Guidance
on RIs and FSs is provided in the Superfund program's
documents Guidance on Remedial Investigations Under
CERCLA, OERR, June 1985, and Guidance on Feasibility
Studies Under CERCLA, OERR, June 1985.
B. REMEDIAL DESIGN
After the RI/FS is completed and the ROD is issued,
the remedial action can be designed. To conduct this
design, the State may use the same A/E firm, as described
in Section D of the previous chapter, or may procure the
services of a different A/E firm. If the State chooses
the latter option, it must conduct the necessary procure-
ment action using the procedures outlined in Chapter III
of this document.
All available information gathered during the RI/FS is
used to develop the preliminary design. Preparation of
the design then is begun and an evaluation is performed to
determine whether any additional data are needed to move
into the final design phase. A design memorandum is sub-
mitted to the State to provide a summary of the design
parameters, the facilities to be designed, and the esti-
mated construction costs. This informs the State of the
direction the engineer intends to take in developing the
design. The products of an engineering design include
detailed construction drawings and precise and complete
technical specifications. The engineering firm should
utilize some form of internal technical review to ensure
the constructability/operability of the design and to
conduct value engineering screens of potential remedies
for the site. In addition, the A/E firm conducting the
design can play a major role in obtaining any permits
necessary to implement the remedial response.
Volume II/IV-5
-------
9375.1-5
Specific types of services that the A/E firm perform-
ing the design may be required to provide will vary con-
siderably, depending on the project at hand. Tasks as-
signed to the design firm may include the following:
Develop preliminary design and performance cri-
teria (if laboratory services are required, QA/QC
procedures must be established and followed; see
Appendix L of Volume I)
Conduct subsurface investigations and/or a sam-
pling program, if necessary to supplement data
gathered during the RI/FS
Conduct site surveys
Prepare the design memorandum
Prepare detailed construction drawings and techni-
cal specifications
Conduct pilot and bench scale treatability studies
Determine bidding and subagreement administration
requirements
Prepare a probable estimate of construction costs
Perform value engineering
Conduct initial constructability/operability re-
views of the design
Prepare an initial O&M plan
Assist in obtaining permits
Attend progress meetings and prepare progress
reports
Develop the preliminary construction schedule
Participate in the public information/community
relations program.
Additional guidance on specific procedures for RDs may be
found in Superfund Remedial Design and Remedial Action
Guidance, OERR, February 1985.
Volume II/IV-6
-------
9375.1-5
C. TECHNICAL BIDDABILITY AND CONSTRUCTABILITY REVIEW
After the design documents have been substantially
completed, the State can begin to develop the subagreement
bid documents to procure the construction contractor, as
described in Section V.B of this volume. Bid documents
include the solicitation itself as well as the subagree-
ment documents. These are highly technical in nature,
outlining all requirements for the proposed project, and
provide the basis for the contractors' bids for the
project.
It is vital, therefore, that the State subject its bid
documents to a rigorous biddability/constructability re-
view prior to initiating the procurement action. This
will help to avoid bid protests and also should reduce the
need for change orders and the potential for claims.
Biddability/constructability reviews should examine the
accuracy and adequacy of the construction specifications,
schedule, estimates of quantities and types of materials,
and cost estimates; they also should ensure that the sub-
agreement bid documents present project requirements in a
clear, coherent manner.
The State has several options for performing this type
of review: it may choose to do so itself, may request the
assistance of the COE through EPA (both of which are dis-
cussed in Section V.C of this document), or may secure the
services of an A/E firm. If the State uses an A/E firm,
it must procure a firm other than the contractor that de-
veloped the design, since this review must be independent.
Specific services that the State may request an A/E
firm to provide in conducting a biddability/construct-
ability review may include the following:
Review construction administration procedures,
such as for payments, construction document con-
trol, change orders, shop drawings, and submittal
of O&M data
Review technical drawings and specifications for
coordination, accuracy, adequacy, and clarity
Review estimated construction schedule and duration
Volume II/IV-7
-------
9375.1-5
Review start-up and operational testing
requirements
Review overall control of work and coordination
with subagreement provisions
Review cost estimates
Prepare summary of recommended changes to sub-
agreement documents, together with estimates of
affects on costs
Review adequacy of occupancy and acceptance
procedures
Review bidding documents
Review instructions to bidders for accuracy, com-
pleteness, and compliance
Review construction subagreement documents for
compliance with applicable regulations.
Specific procedures that States may use to request EPA
assistance to conduct biddability/constructability reviews
may be found in Section C of the following chapter. Addi-
tional guidance may be found in Superfund Remedial Design
and Remedial Action Guidance, OERR, February 1985.
D. BID PHASE; iBfcftVlCES
Use of an A/E firm during procurement of a construc-
tion contractor can provide the State with the experience
necessary to ensure that all tasks associated with the
bidding are performed properly. The State may use an A/E
firm to prepare the text of the solicitation for bids; to
ensure that as many steps as possible are taken to conduct
competitive bidding to include women's and minority busi-
ness enterprises (WBEs/MBEs) and other qualified firms; to
conduct a pre-bid conference; to prepare and issue any
necessary addenda to the bid documents; to direct the bid
opening; to assist the State in evaluating the apparent
low bidder and recommending contract award; and to assist
in the resolution of any bid protests.
Specific tasks that the State may request the A/E firm
to perform during oversight of construction contractor
procurement include the following:
Volume II/IV-8
-------
9375.1-
Prepare the text for solicitation for bids
(advertisement)
Conduct the final biddability/constructability
review of the design prepared by another A/E firm,
including the plans and technical specifications
Conduct claims mitigation review of construction
subagreement documents
Develop and assemble the final subagreement
documents
Issue the solicitation for bids by public notice
and to the reference list of qualified bidders,
MBEs, and WBEs
Advise MBE/WBE agencie,s and construction trade
agencies of the solicitation
Distribute bidding and subagreement documents to
prospective bidders
Distribute lists of prospective bidders to all
plan holders
Conduct a pre-bid conference
Attend progress meetings and prepare progress
reports
Review requests for clarification of documents;
prepare and issue modifications to documents by
addenda
Conduct the bid opening and tabulate the bids
Evaluate the qualifications, financial stability,
and responsiveness of the apparent low bidder
Prepare the recommendation for award of the
subagreement
Assist in the resolution of any bid protests
Participate in the public information/community
relations program.
Volume II/IV-9
-------
9375.1-5
Procedures for solicitation and evaluation of any bids
received are found in Sections D through F of the follow-
ing chapter. See Superfund Remedial Design and Remedial
Action Guidance, OERR, February 1985, for additional
information.
E. CONSTRUCTION OVERSIGHT SERVICES
During construction, the State may use an A/E firm to
act as the State's designated agent to administer the con-
struction subagreement. The A/E firm may provide a var-
iety of services during this phase of remedial response.
Among these may be full-time, on-site inspection, coordin-
ation of materials testing, and review of shop drawings to
ensure that materials and equipment used comply with the
requirements in the subagreements. A/E firms also may
administer change orders to the subagreement, monitor con-
struction progress compared to the construction contrac-
tor's schedule, conduct regular progress meetings, respond
to questions from the construction contractor concerning
the intent of the subagreement documents, and provide
other services to minimize conflicts between the parties
of the subagreement and avoid or resolve claims.
Among the specific tasks that the State may request
its A/E firm to perform as part of construction oversight
are the following:
Prepare construction subagreement documents for
execution
Conduct a pre-construction conference
Conduct periodic site investigations during con-
struction or provide full-time, on-site inspection
Review shop drawings
Administer the construction subagreement and any
change orders
Coordinate materials testing
Review and certify construction contractor re-
quests for payment
Conduct substantial completion and final comple-
tion inspections
Volume II/IV-10
-------
9375.1-5
Conduct periodic progress meetings
Prepare record documents
Monitor the construction contractor's schedule of
construction progress
Maintain complete project records
Respond to requests for information or clarifica-
tion of construction subagreement documents from
the construction contractor
Coordinate construction activities with Federal,
State, and local agencies
Attend progress meetings and prepare monthly pro-
gress reports on the construction
Assist the State in managing change orders
Evaluate claims
Participate in the public information/community
relations program
Prepare the final technical report at the conclu-
sion of the remedial action.
Additional guidance can be found in the document Superfund
Remedial Design and Remedial Action Guidance, OERR,
February 1985.
F. CLAIMS
Occasionally, despite careful project management,
claims will arise that the State cannot resolve easily. If
negotiation does not bring about a settlement, the claim
must be carried into either mediation, arbitration, or
litigation. The State can use an A/E firm to help evalu-
ate the merits of claims and to provide technical exper-
tise during the formal resolution process. In many cases,
claims involve matters of law which require evaluation by
an attorney. In this case, States should seek expert
legal advice; it is not advisable for States to defend
themselves against claims brought by contractors who are
represented by legal counsel without the benefit of legal
assistance.
Volume II/IV-ii
-------
9375.1-5
Specific tasks that.A/E firms may conduct in assisting
States in claims defense include:
Develop an as-built construction schedule and
evaluate it against the planned schedule
Evaluate subagreement language to determine the
design intent as compared to claimed extra work
Evaluate direct costs of claimed extra work
Evaluate the construction contractor's accounting
of overhead costs and the allocation of such costs
to the project
Issue written recommendations concerning the
merits of any claims filed, except when there is
an apparant conflict of interest
Develop a negotiating strategy for claims mitiga-
tion or defense, except when there is an apparant
conflict of interest
Represent the State as an "expert witness," if
required.
A more comprehensive discussion of claims can be found in
Chapter VI of this document.
G. OPERATION AND MAINTENANCE
The State may procure the services of a firm to
implement O&M, consistent with the terms and conditions of
the Cooperative Agreement and 40 CFR Part 33 at the
conclusion of remedial action. The State also may obtain
an A/E firm at this time to conduct the following:
Review and revise the preliminary O&M plan
Evaluate operating staff members' needs
Develop instructional materials and conduct
on-site training programs
Develop maintenance management programs
Volume II/IV-12
-------
9375.1-5
Assist during initial start-up and operational
testing
Develop sampling and analysis programs
Develop records management systems
Prepare detailed O&M manuals
Assist in developing initial O&M budgets
Assist in developing safety and emergency response
programs
Participate in the public information/community
relations program
Assist in the procurement of a firm to conduct O&M*
Prepare the final technical report at the conclu-
sion of the cost-sharing period for O&M
Attend progress meetings and submit progress
reports.
Specific tasks may differ, depending on the requirements
of the site. Additional guidance on O&M plans is provided
in Chapter III, Volume I of this document, and in
Superfund Remedial Design and Remedial Action Guidance,
OERR, February 1985.
*****
Subagreements for construction management must be pro-
perly coordinated with subagreements for the construction
services. The following chapter — Chapter V - Procure-
ment of Construction Services — provides guidance for
If the State wishes to retain a firm to conduct O&M
after Federal assistance ends, it may do so under the
terms of its own State procurement requirements, since
EPA does not share in the costs of O&M beyond the
one-year period.
Volume II/IV-13
-------
9375.1-5
procuring the use of such construction contractors; it
shows where the A/E oversight firms fit into the construc-
tion procurement process and details how this integration
can occur. In addition, after the State has awarded a
subagreement for either remedial planning activities or
construction management, as discussed in this chapter, it
must exercise proper administration procedures to ensure
that the work is implemented in a timely manner and to
help reduce the likelihood of any procurement problems,
such as change orders and claims. Chapter VI - Subagree-
ment Administration provides guidance for proper subagree-
ment administration.
¦i; U.S. GOVERNMENT PRINTING OFFICE
1986 O -
151-911
-------
9375.1-5
V. PROCUREMENT OF CONSTRUCTION SERVICES
-------
9375.1-5
V. PROCUREMENT OF CONSTRUCTION SERVICES
The required method of procuring construction services
during Superfund remedial response is formal advertising
(40 CFR 33.405-33.430). Formal advertising involves the
public solicitation of sealed bids and the award of a
subagreement based on a fixed fee (lump sum, unit price,
or a combination of the two) to the lowest, responsive,
responsible bidder. Formal advertising also requires the
recipient to give adequate public notice of the solicita-
tion inviting bids and to state when and how prospective
bidders may obtain and examine the bidding documents, in-
cluding the subagreement documents. A graphic representa-
tion of this process is presented on the following page as
Exhibit II/V-1.
This chapter provides guidance on the formal ad-
vertising method as it applies to procuring Superfund con-
struction contractors, especially during remedial im-
plementation. Within this framework, it specifically
discusses each of the steps that constitute procurement of
construction services, and potential complications for
this process, in a separate section:
Section A - Development of cost estimates for
construction
Section B - Preparation of subagreement documents
Section C - Technical biddability/constructa-
bility review of the subagreement documents
Section D - Solicitation of bids
Section E - Evaluation of bids
Section F - Bid protests
Section G - Subagreement award.
To provide the maximum benefit to manual users, Section B
contains a detailed discussion of the technical components
of subagreement documents, as well as the process for
preparing them.
Volume II/V-l
-------
EXHIBIT ll/V-1
CONSTRUCTION CONTRACTOR PROCUREMENT PROCEDURES
9375.1-5
( DESIGN \	^
I COWLTTE I w
BOOING AND

FINALIZE BID
CONST nUCTIBILTTY

PACKAGES. PREPARE
REVIEW OF

TEXT FOR

CONSTRUCTION

AOVERTlSEfcCOT
DOCUKtNTS

40 Cf R S3 405
ADVERT S£
TOR
Bros
40CFRU410 vaJ415
CONDUCT
PRE-00
CONFERENCE
PREPARE AfO
ISSUE ADOENOA
TODOCUKCKT8
AS REOURED
RECEfVE
AMD OPEN
BIOS
YES


REVIEW
BIDS FOR

REVIEW
BOOER

«
\

RESPONSIVENESS

RESPONSIBILITY




40 CFR M 430 (b>









OBTAIN
AOOmCNAL
FUNDING




.
NO
i




l£TTER OF INTENT
TO LOWEST
RESPONSIVE.
RESPONSIBLE
61 DOER
40CFR33 110
-------
9375.1-5
While the State retains ultimate responsibility for
ensuring that the procurement is conducted properly, it
has^ several options for preparing and reviewing the
necessary documentation, evaluating the bids, and over-
seeing the procurement process. It may choose to retain
sole responsibility for procurement while consulting with
EPA as necessary; it may request EPA to obtain the assis-
tance of the U.S. Army Corps of Engineers (COE) at appro-
priate points in the procurement process; it may retain
the services of a management firm; or it may use an archi-
tectural and engineering (A/E) firm to oversee procure-
ment. In any case, the procedures contained in this
chapter apply. Details on the types of services that an
A/E firm can be requested to provide during remedial con-
struction are discussed in Chapter IV of this document.
A. DEVELOPMENT OF COST ESTIMATES FOR CONSTRUCTION
The first step in obtaining a construction contractor
is the development of an accurate total cost estimate for
the project. This is essential to ensure adequate funding
for a remedial action. Preparation of a set of high
quality construction plans and specifications for the
project, discussed in the following section of this
chapter, is inadequate unless the project cost estimate is
prepared to the same standards. For most projects, the
final project cost estimate should be within +15 percent
to -10 percent of the actual cost. The total costs should
factor in supervision and administration, and engineering
and design costs during construction; these are calculated
as a percentage of the actual estimated project costs and
together should range between 7 and 9-5 percent (see
Section III.A.2 of Volume I).
The State also should establish a contingency fund for
each site-specific remedial action project to cover un-
foreseen cost variances which may occur prior to or during
construction. Contingencies should be included as part of
the total costs. Contingency funding for State-lead reme-
dial action projects is actually a two-stage process.
First, the State should establish a b?d contingency to
cover variances in cost that may arise before construction
commences. This bid contingency should be included in the
Cooperative Agreement funding the project, and is usually
equal to 15 percent of the actual project cost estimate.
Any amount of the bid contingency not needed to cover var-
iances prior to construction then could be moved to a con-
struction contingency, used to cover variances caused by
Volume II/v-3
-------
9375.1-5
change orders approved during the course of the remedial
action.
In addition, the Region's Superfund Comprehensive
Accomplishments Plan (SCAP) contingency will retain a
construction contingency, equal to 8 to 10 percent of the
project cost, for each remedial action project. If, at
the conclusion of the construction contract bidding
process the State does not have sufficient funds to es-
tablish a construction contingency fund within the 8 to 10
percent range, the State may request the Region to amend
the Cooperative Agreement to add funds for this purpose
from the Regional SCAP contingency. A more detailed dis-
cussion of this subject can be found in Chapter 2 of the
document, Superfund Remedial Design and Remedial Action
Guidance, Office of Emergency and Remedial Response
(OERR), February 1985.
B. PREPARATION OF SUBAGREEMENT DOCUMENTS
After the construction cost estimates are made, the
State can prepare the subagreement documents. These will
be made available to prospective bidders as part of the
bid documents, along with the solicitations for the proj-
ect, and will provide specific information upon which the
construction firms can base their bids. After a sub-
agreement has been awarded, these subagreement documents
will be signed to execute the subagreement. A State can
expedite the procurement process and minimize or avoid bid
protests, change orders, and claims by developing high
quality, unambiguous subagreement documents that contain a
clear and accurate description of the technical require-
ments of the remedial action project, as detailed in 40
CFR 33.255 and 33.420.
Subagreement documents include plans, specifications,
form of subagreement, and all other documents upon which
the remedial action contractor relies to form his bid.
They designate the quality, quantity, and arrangement of
materials and equipment, and specify the methods by which
these materials and equipment are to be assembled at the
job site. They contain a statement of the price to be
paid, payment terms, and time allowed to complete the work
specified. Subagreement documents also provide a descrip-
tion of the terms and conditions of the subagreement to be
awarded and an explanation of the procedures for bidding,
Volume II/v-4
-------
9375.1-5
evaluating bids, and awarding the remedial action sub-
agreement. As such, they must provide complete, accurate
information on all requirements that will be placed on a
construction firm in the course of remedial action.
Subagreement documents must be technically adequate
and complete to promote cost-competitive bids while en-
suring on-time completion of the project within budget.
Failure to adequately prepare construction bid documents
increases the possibility for bid protests, change orders,
and claims for additional compensation. Therefore, it is
especially important that States be aware of the necessary
contents for these documents. To provide States with a
tool to help ensure that the bid documents are complete,
Exhibit II/V-2, on the following page, is a sample check-
list of contents for adequate construction subagreement
documents.
The State has two options in preparing construction
subagreement documents. It may choose to prepare them
itself, in which case it may request assistance from EPA
and, through EPA, from the COE. If the State chooses the
other option, it either may use the services of the A/E
firm that developed the design or may obtain an inde-
pendent A/E firm to prepare the documents. This latter
option is described in Section B of the previous chapter.
To date, these documents typically have been prepared by
the A/E firm that developed the remedial design.
This section provides detailed guidance on the con-
tents of high quality, complete subagreement documents.
It is equally applicable whether the State prepares such
documents or retains an A/E firm to do so.
B.1 Subagreement Provisions
The construction subagreement documents must display
the provisions that will be in the subagreement upon its
execution. Several specific requirements apply to the
necessary contents of the subagreement documents. First,
States, in each subagreement, must include clauses that
meet the intent of 40 CFR 33.1015-33.1021. These sections
contain requirements for:
Subagreement provisions (33.1015)
Labor standards (33.1016)
Patents data and copyrights (33.1019)
Violating facilities (33.1020)
Energy efficiency (33.1021).
Volume II/V-5
-------
9375.1
EXHIBIT II/V-2
SAMPLE CHECKLIST OF
CONSTRUCTION SUBAGREEMENT BID DOCUMENT CONTENTS
Index of Subagreement Bid Documents
Advertisement for Bids
Instructions to Bidders
Bid Form
Addenda Acknowledgement
Bid Bond or Bid Security Form
Certificate of Surety
Acknowledgement of Principal Form
Non-Collusion Affidavit
Certification of Nondiscrimination in Employment
Certification of Nonsegregated Facilities
Authority to Execute Subagreement
Form of Subagreement
Performance Bond Form
Payment Bond Form
Certificate of Ability to Obtain Insurance
General Conditions of the Subagreement
Supplemental General Conditions of the Subagreement
Federal Requirements and Subagreement Provisions
Davis-Bacon Wage Rate Determination
General Subagreement Requirements
	 Scope of Work
	 Control of Materials
	 Utility Coordination Requirements
	 Project Supervision Requirements
	 On-Site Inspection Procedures
	 Safety Requirements and Responsibilities
	 Emergency Procedures
	 Progress Schedule and Report Requirements
	 Payment Procedures (Measurement and Payment)
	 Change Order Administration Procedures
	 Correspondence Distribution
	 Submittal, Processing Procedures
	 Material and Equipment Storage Requirements
Technical Specifications
Drawings and Plans (certified by a registered professional
engineer)
Supplemental Data (e.g., geologic data, hydrologic data)
Volume II/V-6
-------
9375.1-5
Second, States must include the appropriate clauses from
40 CFR 33.1030, or their equivalent, in all subagree-
ments. These clauses contain State and contractor
responsibilities for:
Changes
Differing site conditions
Suspension of work
Remedies
Price reduction for defective cost or pricing data
Audit and access to records
Covenant against contingent fees
Gratuities
Contractor responsibilities
Termination
Final payment
Supersession
Privity of subagreement.
States must be sure to include all subagreement provisions
that will be applicable to the project.
B.2 Specifications
In developing technical specifications for proposed
remedial action projects, the State must incorporate a
clear and accurate description of the technical require-
ments for any necessary materials, products, or services,
along with the required performance schedule. States are
required to avoid the use of detailed product specifi-
cations if at all possible. If the State judges it to be
impractical or uneconomical to clearly and accurately de-
scribe technical requirements, it may use a "brand name or
equal" description to define expected performance or other
technical requirements. The State must clearly describe,
in the technical specifications for projects for which it
is requesting bids, the salient requirements of the named
brand which must be met by offerors (40 CFR 33.255).
B.3 Bonds and Insurance
In accordance with 40 CFR 33.265, States must require
remedial action contractors to furnish bonds as a guaran-
tee of faithful subagreement performance. Remedial con-
tractors also must provide insurance for accidents and
catastrophic loss to manage any risk inherent in com-
pleting the project. Therefore, bonds and insurance re-
quirements must be clearly and accurately stated in the
Volume II/V-7
-------
9375.1-5
subagreement bid documents, including the amounts of
security and coverage that bidders will be required to
provide.
B. 3.a Bonds
Bonds are a form of surety that includes bid bonds,
performance bonds, and payment bonds. For construction
under $100,000, States must follow their own requirements
for bonding. For construction subagreements .over
$100,000, States must meet the intent of the EPA bonding
requirements, articulated in 40 CFR Part 33. The EPA
Award Official may accept the State's bonding policy,
however, if it is equivalent to the EPA requirements.
In accordance with 40 CFR 33.265, States must require
construction contractors to furnish bonds as a guarantee
of faithful performance of the subagreement. These bond
requirements must be stated clearly in the construction
subagreement documents, as follows:
Each bidder shall provide a bid guarantee
equivalent to five percent of the bid price. The
bid guarantee shall consist of a firm commitment
such as a bid bond, certified check, or other
negotiable instrument, accompanying a bid as
assurance that the bidder, upon acceptance of the
bid, will execute such contractual documents as
the State may require within the time specified.
The contractor shall provide a performance bond
equivalent to the subagreement price. The per-
formance bond is required to secure fulfillment
of all the contractor's obligations under the
subagreement.
The contractor also shall provide a payment bond
of 100 percent of the subagreement price. The
contractor executes the payment bond in
connection with the subagreement to assure
payment, as required by law, to all persons
supplying labor and materials in execution of the
work provided for in the subagreement.
Whenever bonds are required, bidders and contractors shall
obtain them from companies holding certificates of
authority as acceptable sureties (31 CFR Part 223).
Volume II/V-8
-------
9375.1-5
B.3.b Insurance
The State should not execute a subagreement until the
contractor has offered sufficient certification that all
contractual insurance requirements have been fulfilled.
Contractors must be aware of the insurance requirements
that pertain to the remedial action construction project
for which they are submitting a bid; the construction
subagreement documents, therefore, must coherently present
the specific types of insurance needed.
Insurance normally required for remedial action
activities includes the following:
Insurance coverage needed by a contractor —
engineering or construction — to protect itself
from direct losses, including:
Property damage
Burglary, robbery, and theft
Dishonesty of employees through forgery or
embezzlement
Builder's risk (with the State as the named
insured)
Insurance coverage needed by a contractor —
engineering or construction — to protect itself
against claims by third parties, including:
Contractor's public liability
Contractor's protective liability
Contractual liability
Completed operation/premises liability
Worker's compensation liability
Comprehensive general liability, bodily injury,
and third party property damage
Vehicle liability — when vehicles are used in the
performance of the subagreement — for collision
liability and protection and indemnity liability
Insurance provided by a contractor to protect the
State, including the State's protective liability
and coverage for damage to State property not
otherwise protected.
Volume II/V-9
-------
9375.1-5
In addition, for work within a special flood hazard area,
the State and contractor must comply with the Flood
Disaster Protection Act of 1973. If the site is within a
special flood hazard area, the construction contractor
must be covered by flood insurance.
Most insurance coverages can be combined so that all
contemplated risks of each classification are covered
under one comprehensive policy. States should seek expert
advice in identifying the required types and amounts of
insurance for each remedial response subagreement.
When the State requires a contractor to provide insur-
ance, the policies should contain an endorsement that any
cancellation or significant change will not be allowed
unless the insurer and the contractor provide written
notice to the State.
Generally, under the Superfund program, contractors
are reimbursed for the reasonable portion of their in-
surance allocable to the subagreement work. (See 48 CFR
31.2 for additional information on such insurance require-
ments.) Insurance requirements eligible for funding must
be specified in the Cooperative Agreement; this includes
Environmental Impairment Liability Insurance. The Agency
recognizes that in some instances requirements for
Environmental Impairment Liability Insurance may limit
competition on remedial response projects. Those firms
that can spread the cost of the associated premiums over
several projects may be more able to keep costs reason-
able, while firms that cannot do this must include the
full cost of such insurance in their bid packages and thus
in many cases are not the lowest bidder. EPA currently is
investigating this issue and will amend this section to
provide additional guidance.
B.4 Payment Terms
EPA and State commitments for transfer of funds under
a Cooperative Agreement and for the drawdown and use of
these funds are detailed in Chapters III and VII of Volume
I of this manual. States are required to develop budgets
to ensure that sufficient funds are allocated for the
project and that they meet EPA financial management needs.
Individual subagreement documents must detail the
payment terms that will govern provision of compensation
Volume II/V-10
-------
9375.1-5
to State contractors. States usually choose to compensate
contractors using progress payments, whereby the State
provides money to its contractor as portions of the work
are completed. Procedures governing progress payments and
State retainage of progress payments are determined by
individual State laws. In general, progress payments may
be made for the amount and value of services and/or con-
struction work performed; for materials and equipment de-
livered to, or stored near, the project site; and for
undelivered items or materials specifically manufactured
•for the subagreement, provided that the appropriate in-
surance, security, and protection of Federal and State
interests are included in accordance with the agreement
documents.
Any State or EPA requirements for documentation to
accompany contractor payment requests must be clearly
described in the subagreement documents. Specific docu-
mentation requested by the State may include progress
reports of services performed as of the date of the re-
quest for payment (usually required for engineering
services), periodic construction progress reports (usually
prepared by the on-site representative on a remedial
action project), and updated construction schedules
(usually developed and maintained by construction
contractors).
In addition, subagreement documents must specifically
describe terms for final payment. These should include
the following items:
Definition of satisfactory completion of all
services and deliverables for engineering sub-
agreements
Requirements for final inspections, certifica-
tions, and warranties, as well as for transfer of
responsibility and liability for construction
subagreements (see Appendix F of Volume I for a
discussion of final inspection and certification)
Requirements for release of retainages, including
those that are contingent upon EPA audit, if any
Means for resolving disputes and claims under the
terms of the subagreement
Volume II/V-11
-------
9375.1-5
Final accounting of all payments, including modi-
fications to the subagreement price as a result of
change order agreements.
These are requirements of the final payment subagreement
clause, contained in 40 CFR 33.1030.
B.5 Project Control Matters
To properly administer a remedial response project,
the subagreement documents must specify the procedures
that the State will use to monitor performance under the
subagreement. Such procedures and requirements should be
detailed in the general requirements section of the sub-
agreement, and may include the following:
Project meetings, including pre-planning, pre-
design, and pre-construction conferences and
periodic progress meetings
Progress schedule development and periodic update
reports
Submittal review procedures
Procedures for payment
Change order administration procedures
Testing and laboratory services requirements
Instructions for preparing record documents
Subagreement closeout procedures
Roles and limitations of responsibility of
contracting parties.
Descriptions of these procedures and requirements in the
subagreement documents help ensure that the contractor is
advised of administrative needs. Contractors thus can
provide an adequate allowance in the proposed fee or bid
price for the costs and potential schedule effects re-
sulting from these requirements.
Volume II/V-12
-------
9375.1-5
B.6 Schedule Requirements
The subagreement documents should require the selected
contractor to prepare, submit, and update a progress sched-
ule for the proposed project. An accurate, updated con-
struction schedule plan is critical to the State's ability
to monitor contractor progress, to evaluate requests for
additional time and money to complete any work beyond the
original subagreement terms, and to forecast the financial
(i.e., cash flow) needs of the project. Specifically, the
schedule can be used to:
Define the contractor's proposed work plan,
showing the order in which the contractor intends
to perform the work
Identify the dates upon which the contractor
intends to start and complete each of the major
components of the work
Identify the dates for submittals and reviews of
submittals
Identify schedules for procurement of materials
and equipment to be used in the work
Assist in determining rates of progress in
completing the work to determine when to make
periodic progress payments.
Subagreement documents should include, as a minimum:
A description of the type of schedule that the
contractor will be required to provide (e.g., bar
chart, Gantt chart, critical path method)
Requirements for updating the schedule, including
periodic analyses of progress, to be submitted in
conjunction with, and as a condition of, the con-
tractor's applications for payment
A description of the relationship of the schedule
to such considerations as pending or authorized
change orders and claims, and threatened or
pending suspension and/or termination of the work
of the subagreement.
Vol lime II/V-13
-------
9375.1-5
The State may choose to include additional requirements,
as necessary. Potential contractors will factor time and
resource requirements for schedule development and updates
into their bids for the construction subagreement.
B.7 Change Order Provisjpns
An important consideration to be addressed in these
documents is administrative requirements for changes in
the subagreement scop# of work. Thorough, expert pre-
paretion of sutagrewnent language concerning change orders
is of critical importam* ia controlling project costs,
promoting satisfactory protect progress, and reducing the
potential for claims ami litigation. The subagreement
docuiMBtc must:
Clearly describe how additions, deletions, or
revisions in the work may be made without in-
validating the subagreement
Define exactly what is meant by a change order;
for example, by specifying conditions that would
warrant a change order
Describe the procedures to be followed in pre-
paring change order documents, including the form
and content of the initial request for changes in
the work, as well as required documentation of the
»Accepted chtage
Include a statement covering subsequent recourse
should the contracting parties not be able to
reach agreement on a proposed change.
The documents also must specify any required limitations
to increases in the subagreement price and/or extensions
of the subagreement period of performance.
B.8 Health and Safety Issues
Much of the work performed under remedial sub-
agreements, both engineering and construction, may be
inherently hazardous. States, therefore, must require
their contractors to satisfy all Federal, State, and local
statutes, regulations, and ordinances related to health
and safety practices. Contractors also must be required
to develop and submit to the State for review, a health
and safety plan for the specific project work. This key
Volume II/V-14
-------
9375.1-5
subagreement requirement can be enforced by including in
the subagreement a provision specifying that payment will
be .contingent upon the contractor's satisfactory com-
pliance with all applicable health and safety requirements.
States are required to have site health and safety
plans in place before field activities can commence;
specific discussion of this requirement is contained in
Appendix M of Volume I of this manual. Normally, States
will engage a contractor for technica1. services to develop
their health and safety plans.
B.9 Subagreement Close-Out Requirements
The subagreement documents should contain a concise
description of how the State will determine that work has
been completed satisfactorily in accordance with the terms
of the subagreement. The documents must specify such
items as:
The manner in which the project will be determined
to be substantially complete
A description of the contractor's liabilities and
responsibilities at the time of substantial com-
pletion, including any operation and maintenance
(O&M) procedures to be performed by the contractor
at the site
The State's liabilities and responsibilities at
the time of substantial completion of the project,
including any site O&M procedures to be performed
by the State
Requirements for final inspection
Requirements for submission of a final technical
report
Procedures for applying for and receiving final
payment
Volume II/V-15
-------
9375.1-5
A description of the contractor's continuing
obligations subsequent to subagreement completion;
this may include, for example, warranties, guaran-
tees, and, often for remedial action projects, a
one-year warranty and maintenance of the surety
bond to guarantee adequate performance of the
project's facilities.
Under Cooperative Agreements, States are required to
submit a remedial action report which documents that the
criteria established in the feasibility study (FS) and the
Record of Decision (ROD) have been met. States generally
will rely on the A/E firm that it has engaged to develop
this report. Therefore, as a provision in the
subagreement documents, a State should require the
construction contractor to provide the information
necessary to prepare the remedial action report for EPA.
A State must carefully and clearly define its requirements
for developing this report. This is especially
significant for future deletion of the site from the
National Priorities List; if EPA does not delete a site
due to inadequacies in the State's remedial action report,
the State may have to reinitiate procurement to correct
the problem.
C. TECHNICAL BIDDABILITY AND CONSTRUCTABILITY REVIEW
States should consider having their bid documents for
remedial action projects subjected to an independent
biddability/constructability review, after design is
substantially complete, as a method of preventing bid
protests. Such technical assistance should contribute to
the efficient, effective implementation of remedial
activities.
A biddability/constructability review for remedial
action generally:
Reviews the accuracy of the construction speci-
fications and cost estimates
Determines whether currently accepted construction
practices and techniques are being used
Volume II/V-16
-------
9375.1-5
Determines the adequacy of the proposed components
of the quality assurance project plan, the draft
O&M Plan, and the site safety specifications
Determines whether the bid schedule included in
the specifications will enable the construction
contractor to submit a fair and reasonable bid
Determines the accuracy of any estimated quan-
tities of material specified in the design
Determines that the responsibilities and liabili-
ties of the construction contractor and the State
are clearly defined and detailed in the design
documents.
Tasks that may be required during biddability/con-
structability review are detailed in Section D of the
previous chapter and in the document Superfund Remedial
Design and Remedial Action Guidance, OERR, February 1985.
The State may perform this review itself, may obtain
the service of an A/E firm to do so, or may request EPA to
secure the assistance of the COE to conduct biddability/
constructability reviews. COE reviews will occur con-
currently with any internal review the State may choose to
conduct and should not result in delays to the remedial
action procurement process. Because the COE routinely
performs remedial activities for Federal-lead remedial
sites, they are well qualified to perform biddability/
constructability reviews for Superfund remedial action
projects and their technical expertise should prove
extremely useful to a State. As a condition of the
Cooperative Agreement, EPA also may require the COE to
perform such a review for States whose projects EPA
considers to be technically complex or to have severe time
constraints.
A State may request COE review by contacting its
Regional- program office. The appropriate Remedial Project
Manager (RPM) will prepare a request for such a review
under EPA's technical assistance Inter-Agency Agreement
with the COE. The RPM should consider the cost of such a
review and incorporate it into the Region's SCAP estimates
at the beginning of the fiscal year. Should it prove
impossible to include the required costs in the SCAP, the
RPM may request use of funds from the Regional SCAP
contingency fund for remedial planning activities. The
Volume II/V-17
-------
9375.1-5
Headquarters SCAP contingency fund for remedial action
activities also can be used if all other options have been
considered and will not provide sufficient assistance.
Internal State reviews should use the same general
criteria as those performed by the COE. Biddability/
constructability review by an independent A/E firm is
discussed in Section IV.C of this volume.
D. SOLICITATION OF BIDS
When soliciting bids, States are required to give
adequate public notice of a proposed project. To
accomplish this the State should publish notifications in
daily newspapers and periodicals of sufficient circulation
to promote effective competition, such as newspapers with
a State-wide circulation and trade journals.
Information describing bidding procedures generally is
contained in several sections of the public notice of
solicitation and the bidding documents for the project.
States must ensure that the bidding documents are clearly
written, explicit, and internally consistent as described
above. The documents must include the following elements:
A statement giving adequate public notice of the
solicitation, inviting bids, describing the work
required for the project, and explaining when and
how the subagreement documents may be obtained or
examined (40 CFR 33.410)
The requested scope of services
Requirements for using minority and women's
business enterprises
Instructions to bidders
A clear explanation of the recipient's methods of
bidding and of evaluating bid prices, and the
State's basis and method for awarding the
subagreement (40 CFR 30.420(c))
The deadline (date and time) and place to submit
bids (40 CFR 33 .420(f))
The required bid form (or proposal)
Volume II/V-18
-------
9375.1-5
The date,, time, and place at which the bids will
be publicly opened and read (40 CFR 33.425)
Representations and certifications
Names of persons to contact with questions
Measurement and payment requirements
General (and supplementary) conditions of the
subagreement.
For complex subagreements or where unique circumstances
require, the State may wish to conduct a pre-bid
conference. At the pre-bid conference, bidding procedures
are explained and prospective bidders are given the
opportunity to raise questions about the project.
E. EVALUATION OF BIDS
Bids are received in sealed envelopes from prospective
contractors and are opened publicly at the date and time
specified in the solicitation (40 CFR 33.425). Bids are
reviewed for general responsiveness to the bid solici-
tation and the name and amount of each bid is read aloud.
The State must uniformly and objectively evaluate all
bids submitted in response to a solicitation, to award the
subagreement to the lowest, responsive, responsible bidder
(40 CFR 33.430). In doing so, the State must use the
methods and criteria described in the subagreement docu-
ments (40 CFR 33.515). This evaluation is intended to
fulfill two purposes. First, it confirms the bidder's
responsiveness to the contractual requirements of the
solicitation for bids. To be responsive, a bid must
constitute a definite and unqualified offer to meet all
material terms of the Invitation for Bids (IFB). Material
items are those that affect price, quality, quantity, or
delivery, or those that must be complied with at the risk
of rejection for nonresponsiveness. Exhibit II/V-3, on
the following page, provides a sample bid tabulation
checklist for confirming bidder responsiveness.
Second, the bid evaluation establishes the
responsibility, qualifications, and financial stability of
a bidder to perform the work of the project in accordance
with the subagreement documents, to the State's satis-
faction, and within the prescribed time. An evaluation of
Volume II/V-19
-------
9375.1-5
PROJECT:	EXHIBIT ll/V-3
CONTRACT NO..	SAMPLE BID TABULATION CHECKLIST
BID DATE:
Contractor
Total Bid Amount
State
Registration No.
Addenda
Acknowledged
o
a
CO
c
CD
U)
Bid Bond
Compliance
Statement
Non-Collusion
Statement
Certfication
Non-Discrimation
Statement
Experience
Statement
Power of
Attorney/Bond
Surety Co.
Statement
Surety Certificate
Comments























































































































)




























































-------
9375.1-5
a bidder's responsibility must include consideration of
the following items:
Past (completed) project performance record and
current workload
A list of major equipment available for use, and
the extent of ownership interest in each item
Credit references from materials suppliers
Bank references
Insurance references
Bonding company references, including present
bond capacity
Qualifications of proposed subcontractors
Experience of the proposed job superintendent and
foremen
Verification that the contractor or its employees
have not been banned from assistance program
participation by EPA (i.e., review the U.S. EPA
Master List of Debarred, Suspended, and
Voluntarily Excluded Persons, available from
Regional grants offices and the Office of
Regional Counsel) (40 CFR 32.400).
Exhibit II/V-4, on the following page, depicts a sample
bid review checklist for evaluating a bidder's responsi-
bility. The State may obtain assistance from an A/E firm
in evaluating the bids, as described in Chapter IV, but
the State has full responsibility for ensuring that the
evaluation is conducted properly.
Two potential problems may be encountered in bid
reviews: bids may exceed the project budget stated in the
subagreement documents and solicitation, or bids may be
significantly less than the project budget. Both of these
are discussed below.
E.1 Bids Exceeding the Project Budget
Bids in excess of the project budget may result from
one or more of the following causes:
Volume II/V-21
-------
9375.1-5
EXHIBIT II/V-4
SAMPLE BID REVIEW CHECKLIST
FOR CONTRACTOR RESPONSIBILITY
Project:	Contractor:
Bonding Company
Underwriter:
Local Agent:
Address:
Contact:
Telephone:
Years Affiliated:
Bond Capacity:
Bank
Name:
Address:
Contact:
Telephone:
Years Affiliated:
Insurance Company
Name:
Address:
Contact:
Telephone:
Years Affiliated:
Credit Reference (Materials Supplier):
Past Contracts:
Debarment - Is contractor, or a member of the contractor's firm,
included on EPA Master List of debarments?
Present Workload
Owner	Description Engineer (Reference) Value ($)
Contract List
(3 years)
Equipment List
Resumes, Supt:
Foreman:
Volume II/V-22
-------
9375.1-5
Subagreement documents may be incomplete, in-
accurate, or ambiguous, thus forcing the bidder
to add contingencies to the bid to cover the
uncertainty of expected performance.
An unreasonable period of time for completion of
the work may require an accelerated rate of
production at a higher project cost.
Construction specifications may be unduly re-
strictive, for example, by imposing unreasonable
or unfair conditions on the contractor or by
unnecessarily restricting methods of construction
and selection of materials and products.
An insufficient period of time between the
solicitation for bids (advertisement or request
for proposals (RFP)) and bid opening may prevent
careful analysis and preparation of bids or
proposals.
The responsibility for incomplete or uncertain
data affecting the work may have been placed on
the contractor, who then must include con-
tingencies in the bid to cover the cost of the
worst possible conditions. For example, speci-
fications that place unreasonable or technically
impossible performance criteria upon the con-
tractor may result in bids that include un-
desirable contingencies, such as for differing
site conditions. States are reminded of the
requirement to include model subagreement clauses
in each subagreement (40 CFR 33.1030); the model
subagreement clause for differing site conditions
does not allow States to shift risk associated
with differing site conditions to contractors.
The original project budget may be in error com-
pared with the true market cost of completing the
work.
The State should consult with its A/E design firm when
bid prices significantly exceed estimates. If the lowest,
responsive bid received exceeds the amount anticipated in
the project budget, the State may, at its option, im-
plement one of the following actions:
Volume II/V-23
-------
9375.1-5
Reject all bids and revise the documents
(correcting any problems such as those noted
above and/or reducing the project scope) and
rebid the work
Augment the available project funds with non-EPA
funds
Request additional EPA financial assistance
(after pursuing other options).
If the State chooses to take deductive alternates (defined
as optional scope of work items clearly identified as such
in the bidding documents), it must ensure that all respon-
sive bids are reviewed under the revised bid formulation
and that deductive alternates have been taken in the exact
order shown in the IFB. The State also must ensure that
only sufficient deductive alternates have been taken to
reduce at least one of the bids to or below the amount of
funds available and the scope of the project remains
consistent with the original project description.
If the low bid still exceeds the amount of available
funds, the State may:
Augment the available project funds with non-EPA
funds
Reject all bids and ask the design engineer to
redesign the project, within the scope of the
ROD, to reduce the total project cost
Request additional EPA funding.
The last option requires the State to provide EPA with
documentation supporting the need for additional funding.
Such documentation must include written confirmation that
redesign of the project within the approved scope and
project schedule cannot reasonably be expected to suf-
ficiently reduce the cost of the project- and a certifica-
tion that the State cannot reasonably provide the addi-
tional funds required.
Volume II/V-24
-------
9375.1-5
E.2 Bids Significantly Less Than the Project Budget
Bids significantly less than the project budget or out
of line with other bids can result from any of the
following causes:
Subagreement documents may be technically in-
complete or may not adequately describe the scope
of the project
The project budget may be overstated (overly
conservative)
The low bidder may have made a mathematical error
in the preparation of the bid or may have signi-
ficantly underestimated the scope of the project
The subagreement documents may be administra-
tively ambiguous on the subject of how the bid is
to be prepared
The low bidder may have purposely submitted an
unreasonably low bid in an attempt to "buy-in".
Buying-in means intentionally submitting an offer below
calculated costs, while anticipating an increase in the
subagreement amount after award (e.g., through unnecessary
or excessively priced change orders), or expecting to
receive follow-on subagreements that would result in the
recovery of losses incurred on a buy-in subagreement.
Preparation of complete, accurate RFPs and bid documents
that clearly describe the scope of services or work
required can minimize buying-in benefits and control
additional costs after award.
If a bid mistake is discovered or suspected, the State
must request written verification of the bid amount in
question from the bidder, allowing the bidder adequate
time to respond. The bidder either may confirm the bid
amount by denying the error or may confirm the mistake and
request that the bid be either corrected or withdrawn. To
be allowed to correct a bid, the bidder must demonstrate
by clear and convincing evidence the existence of the
error, its nature, how it occurred, and the intended
amount. To withdraw a bid, the bidder must confirm the
existence of the error and how it occurred, and must re-
quest that the bid be withdrawn. Procedures for bid cor-
rection and withdrawal normally are included under an
"Instructions to Bidders" section of the bidding documents.
Volume II/V-25
-------
9375.1-5
States must carefully consider and document each
request for bid correction or withdrawal to ensure that
the integrity and legality of the bidding process is not
compromised and that the correction or withdrawal is not
unfair to other bidders. In many cases, if consistent
with State law, a State must waive minor informalities and
irregularities in the bid if doing so does not give a
bidder an identifiable advantage or benefit not enjoyed by
other bidders which would prejudice the subagreement award.
If the lowest bid is significantly less than the
project budget and the State has reasonably determined the
bidder to be responsive and responsible, the subagreement
should be awarded and the remaining funds used as a
contingency during construction. In this case, however,
States should be alert to the possibility of a "buy-in"
and should be prepared to administer the subagreement in a
manner that adequately controls change order costs.
F. BID PROTESTS
Bid protests are written complaints filed by parties
with a direct financial interest affected by the State's
procurement action. Complaints typically concern the
solicitation (e.g., content or wording of, or deficiencies
in, the IFB or RFP and in specifications) or the actual
award of subagreements. Bid protests may significantly
delay the initiation of a remedial project. Thus, in
order to reduce the likelihood of bid protests, it is
vital to ensure that solicitations for bids or proposals
be clear and unambiguous, and accurately present the
State's needs without unduly restricting competition.
A State is required to establish procedures to
promptly consider and resolve bid protests when they are
filed (40 CFR 33.1110). Although not required to do so, a
State generally should defer award of the subagreement and
delay initiation of remedial activities until it can make
a determination on the protest. If the State does not
defer the procurement, it assumes the risk that the EPA
Award Official may disallow the cost of the procurement
action(s) in question, in the event that a protest appeal
is filed and upheld. Upon the State's resolution of the
bid protest, all affected parties have seven calendar days
to file a protest appeal with the appropriate EPA counsel.
A protestor may file an appeal with EPA only after the
State has acted on the bid protest and the protestor has
Volume II/V-26
-------
9375.1-5
exhausted all available administrative remedies at the
State level. Further, the protestor may file an appeal
only when the State's procurement action has adversely
affected the protestor's direct financial interests. A
subcontractor may file a protest appeal only for issues
relating to a contractor's award of a subcontract. The
administrative process for EPA's resolution of bid protest
appeals is contained in 40 CFR 33.1105-33.1145.
When EPA receives a protest appeal, the Agency will
request the State to defer award of the disputed sub-
agreement (40 CFR 33.1140). If the protestor does not
agree to a request from the State for a reasonable ex-
tension of the bid or bid bond period while the protest or
appeal is pending, the State or EPA can summarily dismiss
the protest or appeal.
EPA's review of protest appeals is limited to issues
arising under the provisions of 40 CFR Part 33 and from
alleged violations of State and local laws or ordinances
when EPA has determined that there is an overriding
Federal concern. EPA reviews the record considered by the
State and any additional information regarding the basis
of the appeal and renders a final decision (40 CFR
33.1130-33.1145). EPA's decision concerning a protest
appeal is the final EPA action on the subject. If a State
does not comply with EPA's determination, EPA may take
action against the State under 40 CFR Parts 30 and 32 (40
CFR 33.1145(i)).
G. SUBAGREEMENT AWARD
If the State has self-certified its procurement
methods to EPA and EPA has not exercised its authority to
review and approve the award prior to its being made (40
CFR 33 Subpart A), the State can issue a formal Notice of
Award to the contractor immediately after its selection as
a result of the bid evaluation. If the State is not
self-certified, EPA must be given the opportunity to
review the procurement actions taken by the State before
formal Notice of Award can be given. In addition to the
Notice of Award, the State must issue instructions to the
contractor regarding the execution of the subagreement and
the filing of insurance required for construction, as
detailed in the subagreement bid documents. At the time
of award, it is customary to provide each bidder with a
copy of the bid tabulation.
-------
9375.1-5
The State must properly administer the subagreement
for construction after its award to minimize the need for
change orders and to avoid claims. Procedures for effec-
tive subagreement administration are found in the fol-
lowing chapter, Chapter VI - Subagreement Administration.
To provide assistance in overseeing the conduct of the
remedial action, the State may obtain the services of an
A/E firm, as detailed in Chapter IV - Engineering Services
During Remedial Response.
Volume II/V-28
-------
9325.1-5
VI. SUBAGREEMENT ADMINISTRATION
-------
9325.1-5
VI. SUBAGREEMENT ADMINISTRATION
Subagreements must be administered carefully to mini-
mize unnecessary change orders and avoid claims. Change
orders and claims are most likely to occur as part of
construction, but may happen at any phase of remedial
response. Major components of a good subagreement admin-
istration process are discussed in this chapter. Section
A provides guidance on holding a preliminary performance
planning conference after subagreement award, to inform
all key personnel of the roles and responsibilities of
each of the interested parties. Section B discusses the
submission of periodic progress reports to enable the
State to closely monitor the project and to be advised of
any problems that may develop. Section C considers issues
relating to change orders, including conditions that war-
rant change orders, change order evaluation, and change
order preparation. Finally, Section D addresses issues
relating to contractor claims.
A. PRELIMINARY PERFORMANCE PLANNING CONFERENCE
After award of a subagreement, the State should
arrange a conference with key contractor personnel to
explain subagreement requirements and administrative pro-
cedures. For construction subagreements, this meeting
typically is known as a pre-construction conference. For
engineering services associated with remedial design (RD),
this meeting usually is called a pre-design meeting.
Similar meetings should be held for the other phases of
remedial response.
These meetings are intended to promote efficient,
cost-effective mobilization of the work by:
Emphasizing applicable regulatory requirements
Setting the ground rules for working relation-
ships between State and contractor personnel
Identifying the responsibilities and authorities
of each party
Identifying interrelationships of contractors,
consultants, the State, the municipality, EPA,
the U.S. Army Corps of Engineers (COE), and other
involved parties
Volume II/VI-l
-------
9325.1-5
Highlighting critical subagreement requirements
Discussing project completion schedules or inter-
mediate milestones and any required coordination
between contractors
Discussing progress reporting and subagreement
payment procedures
Emphasizing requirements for such issues as com-
pliance with Federal, State, and local laws and
regulations, such as equal employment opportun-
ity, and for the use of minority, women's, small,
or disadvantaged business enterprises
Detailing subagreement change order procedures,
insurance bonding, and safety requirements.
Discussion of these items at an early stage of all sub-
agreements is critical to efficient and effective project
administration.
B. MONITORING WORK PROGRESS - PERIODIC PROGRESS REVIEW
EPA conducts an ongoing review of technical progress
to ensure that the State carries out its Cooperative
Agreement commitments. Therefore, all contractors using
EPA funds, providing engineering or construction services,
or performing some other service for the State, should
prepare reports on their activities. The State Project
Officer (SPO), then, can use these reports to keep EPA
informed about progress at the site. Monthly contractor
reports should advise the State of any anticipated prob-
lems in completing work within the terms (scope, time, and
amount) of each subagreement to ensure that the State and
EPA are involved early in their resolution.
The report should be brief and, at a minimum, should
include the following elements:
Project/Subagreement Identification Information:
project title; subagreement number; date of the
report; contractor's name; project phase/sub-
agreement type (whether the contractor is per-
forming services during the RD, biddability/
constructability review, bid, construction, or
operation and maintenance (O&M) phase of the
remedial activities); services offered (e.g..
Volume II/VI-2
-------
9325.1-5
engineering, sample testing, well drilling, con-
struction, claims analysis/defense); and report-
ing period.
Cash Flow: original subagreement value; amount
of approved change orders; current subagreement
total; cumulative payments to the contractor to
date. The percentage of the current subagreement
amount paid to the contractor should be computed
and listed, and an estimate of the percentage of
the work that has been completed should be pro-
vided .
Schedule: original subagreement duration, in
days; original subagreement completion date;
number of days of approved time extensions; cur-
rent total days of approved subagreement duration
(including extensions); approved subagreement
completion date; days elapsed to date; percentage
of subagreement time expended.
Financial Impacts: the contractor should report
any issues pending or identified in the last
reporting period that may affect the subagreement
amount. This includes any pending change orders
or potential claims. The contractor should dis-
cuss the nature of the problems, proposed actions
for resolution or mitigation, and their eligibil-
ity for compensation under the State's Coopera-
tive Agreement.
Affect on Progress: the contractor should iden-
tify any activities that have fallen behind
schedule or any problems observed or expected
that may delay timely subagreement completion.
The contractor should discuss the nature of the
problems reported, proposed actions for their
resolution or mitigation, and their eligibility
for compensation under the State's Cooperative
Agreement.
Monthly progress reports should contain the specific in-
formation in the sample presented in Exhibit II/VI-l, on
the following page.
Contractor reports should form the basis of States
quarterly reports to EPA required by the Cooperative
Agreement (discussed in further detail in Appendix F of
Volume I). States may wish to include copies of contrac-
tors' monthly reports as addenda to State quarterly
Volume II/VI-3
-------
EXHIBIT II/VI-1
SAMPLE MONTHLY PROGRESS REPORT
9325.1-5
EPA Project No. 	 Report Date
Project Title 		
Subagreement. No. .	
Contractor	.	
Project Phase 	 RI/FS 	 Design 	 Constructability/Biddability
(Subagreement) 	 Bid 	 Construction 	 O&M 	
(OTHER)
Services Offered 	
Reporting Period From: 	
CASH FLOW
A.	Original Subagreement Amount $ 	 A.
B.	Approved Change Orders	$ 	 B.
C.	Current Total	$ 	 C.
D.	Cumulative Payments to	D.
Date	$ 	
E.	Percent of Current	E.
Subagreements Amount Paid 	%
F.	Estimate of Percent Work	F.
Complete		%
(Explain Variance Between E & F Below)	G.
FINANCIAL IMPACTS
(e.g. Pending Change Orders - Amounts & Eligibility & Possible Claims)
AFFECTS ON PROGRESS
(e.g. Activities Behind Schedule & Observed Problems)
(Additional Comments on Back)
Contractor's Project Manager
SCHEDULE
Original Subagreemerit Duration
	 days
Original Subagreement
Completion Date 	
Approved Time Extensions
	 days
Approved Subagreements Duration
	 days
Approved Subagreement Completion
Date 	
Duration to Date 	 days
Percent of Time Expended 	%
Volume II/VI-4
-------
9325.1-5
reports to EPA. This is particularly appropriate for
complex remedial planning or action projects or when a
problem on a project, which will significantly affect
project cost or progress, exists or arises. The State
should not wait until the next quarterly report to inform
EPA of significant changes in project cost or work pro-
gress, but should do so immediately.
The State's quarterly reports to EPA will help, the EPA
Remedial Project Manager (RPM) to monitor the progress and
conduct of the remedial activity. The content of these
reports must be sufficient to present a chronological
record of all site work and should include the following
elements:
An estimate of the percentage of the project
completed and the total project cost to date
Summaries of the following items for the report-
ing period:
Work performed on the site
Community relations activities including
community contacts, citizen concerns, and
efforts to resolve any concerns
Summary of change orders made to the sub-
agreement to date and their total costs, and
technical and administrative analyses to
document the need for such changes (see
Section C.3 of this chapter)
- Problems or potential problems encountered
Status of the contingency fund to date (amount
used and the amount remaining)
Projected work for the next reporting period.
The report may include other elements, as necessary and
appropriate.
C. CHANGE ORDER ADMINISTRATION
A change order is a written order issued by the State
or its designated agent to its contractor authorizing an
addition to, deletion from, or revision of a subagreement
for either engineering or construction services. A change
Volume II/VI-5
-------
9325.1-5
order is issued after execution of the subagreement to
modify, within the scope of the project, the subagreement
cost or scope of work; to interrupt or terminate the proj-
ect; to revise the completion date; or, in general, to
implement any deviation from the original subagreement
terms and conditions. Change orders may occur during any
phase of remedial response, but are most likely to arise
during construction, when there is a greater chance of
encountering unforeseen site condition, changes in esti-
mated quantities, and other potential project delays.
Proper change order management is a key element to
avoiding delays in remedial response, increased costs, and
potential contractor claims. During remedial action,
States may manage construction subagreements directly, may
authorize the architectural/engineering (A/E) firm to do
so, or may secure the services of an independent con-
struction oversight firm. EPA also will consider funding,
as part of the Cooperative Agreement with the State, the
services of a firm specializing in change order manage-
ment. For the Superfund program to date, the design
engineering firm frequently has provided construction
oversight services. Administrative requirements for
management of change orders, including timing, form, and
provisions for construction subagreement adjustments,
appear in the model subagreement clauses of 40 CFR
33.1030. This section outlines change order procedures
specific to the Superfund program.
C.1 Conditions That Warrant a Change Order
Change orders may be required for the following condi-
tions :
Differing site conditions, such as:
- Subsurface or latent physical conditions at
the site differing materially from those
indicated in the subagreement
Unknown physical conditions at the site,
conditions of an unusual nature, or condi-
tions differing materially from those or-
dinarily encountered and generally recog-
nized as inherent to work of the type pro-
vided for in the subagreement.
Volume II/VI—6
-------
9325.1-5
Errors and omissions in plans and specifications;
errors are items that are described incorrectly
in the plans or specifications, whereas omissions
are items that are neither shown nor specified.
Changes instituted by modifications of regulatory
requirements, such as:
-	Changes in requirements for protecting his-
torical or archeological objects
Revisions to building codes
Revisions to zoning and land use plans
Revisions to Federal regulations and policies
-	New congressional legislation.
Design changes, such as modifications to the
existing design which will offer a savings in
excess of all costs associated with the change
order, including future operation and maintenance
costs.
Overruns/underruns in quantities.
Factors affecting time of completion, such as:
Temporary suspension of work
Directed acceleration
-	Time extension for delay beyond the con-
tractor's control
Constructive acceleration.
Changes in subagreement administration proce-
dures , such as:
-	Progress payment terms
-	Retainage release
Occupancy
Testing
-	Acceptance
-	Warranties.
Resolution of claims.
Volume II/VI-7
-------
9325.1-5
Emergency conditions, such as acts of God or
civil disturbance.
Design changes usually originate as proposals volunteered
by the construction contractor, recommended by the engi-
neer, or requested by the State. Overruns or underruns in
quantities occur only in subagreements that are formulated
as a series of unit prices bid for each unit required
(e.g., cubic yards of earth moved), and are developed when
there is a difference between the quantities estimated in
the bid schedule and the quantities actually required to
complete the bid item.
C.2 Evaluating Change Order Requests
In reviewing a contractor's request for a change or-
der, the State must evaluate the subagreement documents
and the contractor's compliance with the subagreement
requirements. A sample checklist for the State to use in
evaluating change orders is presented in Exhibit II/VI-2,
on the following page. If the request for a change order
was the result of errors and/or omissions in the plans and
specifications, the State must determine the nature of the
error or omission, the pertinent references in the plans
and specifications, the original intent of the references,
and whether the error or omission led to increased con-
tractor costs. At times, the need to comply with changes
in laws or regulations may require the State to issue a
change order. Similarly, the State should evaluate other
requests for change orders such as design changes or
underruns/overruns in quantities of materials.
Ultimate responsibility for administering change or-
ders rests with the State. Specifically, the State is
responsible for:
Determining whether a subagreement change order
is warranted, based on the terms of the existing
subagreement and a review of the circumstances
responsible for the alleged change
Negotiating a fair and reasonable price for each
required subagreement change
Maintaining accurate and complete cost records
for the change, including records of negotiation
Volume II/VI-8
-------
*325.1-5
EXHIBIT II/VI-2
SAMPLE CHECKLIST FOR STATE CHANGE ORDER APPROVAL
SCREENING - to determine whether the information and documentation provided are sufficient for detailed review. (If insufficient information is
provided, the documentation should be returned to the contractor for additional information.)
<
o
IDENTIFICATION
Project name
Subagreement number
EPA project number
State project number
Change order number
Subagreement date
Change order date
Name, address, and telephone number of contractor
CHANGE TO SUBAGREEMENT PRICE
Dollar amount of cnange shown (zero for no change)
Contractor's cost breakdown adequately documented
Profit entered separately
Independent estimate from State or its agent including
verification of costs for new items
Documentation referenced, attached
Unit prices in accordance with subagreement documents and
regulatory requirement*)
Arithmetic correct
PRIOR APPROVAL
6. CHANGE TO SUBAGREEMENT T1MU
I
Required from EPA
Gbtained from EPA
DESCRIPTION OP CHANGE
Statement of number of days (or zero days)
Documentation (schedule analysis) referenced and attacned
7. APPROVALS
Clear, unambiguous 9cope
Revised plan and specification sneets referenced
and attached .
Design data and calculations attached
Change is within project scope
Design is adequate (construction subagreereents)
Increases/reduces time and/or cost of project
Affect on operation and maintenance costs
Proper approval signatures entered and Jetted
REASON FOR CHANGE
Clear, understandable statement
Cause of remedial change
Reason why not in original subagreement
References and attached substantiating documentation
Applicable subagreement provisions cited
8. ATTACHMENTS LISTED AND INCLUDEO
Memorandum of Negotiations
Cost and pricing data attached and certified by
contractor
Change Order and Notice to Proceed
B. DETAILED REVIEW - for approval (or disapproval) of change order. After the recipient determines that a chango order file is complete and in
order, the State subjects the change order to a detailed evaluation and review. The result of this evaluation ii a ruling to approve tho chongu
order, to deny the change order, or to deny the change order pending receipt of additional information.
-------
9325.1-5
Adequately documenting, for future reference, a
description of the agreed change and reason for
this change
Maintaining current and accurate fiscal projec-
tions of subagreement and project completion costs
Executing subagreement change order documents
efficiently and in a timely manner
Resolving disputes that may arise as a result of
a proposal for a change
Notifying EPA in writing of events or proposed
changes that may require a Cooperative Agreement
amendment
Assessing the impact of change orders on progress
toward project completion and acting to mitigate
resulting project delays.
To expedite State review and approval of change orders,
contractors must:
Adequately describe the reason for each change
request
Submit change order proposals in accordance with
the procedures set forth in the subagreement
documents and enter into meaningful negotiations
on a necessary subagreement change
Furnish and certify the accuracy and completeness
of cost and pricing data to allow the State to
determine the necessity and reasonableness of the
cost proposed, and to enable EPA to determine the
eligibility and allowability of the extra work
performed at the cost proposed.
Proj-ect delays and disputes resulting from change
orders can be limited by effective and frequent communica-
tion between States and contractors. When a request for a
change order is submitted, the State should request and
obtain from the contractor a detailed proposal containing
a thorough description of, and outlining reasons for, the
change, and a detailed explanation of claimed extra
costs. The change order request also must reference the
original subagreement documents and must explain the
specific circumstances associated with the change.
Volume II/VI-10
-------
9325.1-5
When the State receives a change order request, it
must investigate promptly the circumstances for the re-
quest, reach a "decision on the merits of the change, and
notify the contractor of that decision. All negotiated
change orders exceeding $10,000 must have a State-
conducted cost analysis (40 CFR 33.290(a) and Chapter II
of this volume).
Upon reaching agreement with a contractor on the
description and cost of each change order, the State
should execute promptly a change order document which
modifies the base subagreement to include agreements
reached.
C.3 Superfund Requirements for Change Order Management
To ensure that adequate change order funds are avail-
able during the remedial action, the Cooperative Agreement
funding the action will include a construction contin-
gency. This contingency fund is usually expressed as a
percentage of the total project costs, and is usually in
the range of eight to ten percent. (For additional gui-
dance on estimating construction costs and contigencies,
see Superfund Remedial Design and Remedial Action Gui-
dance, Office of Emergency and Remedial Response (OERR),
February 1985, and Section V.A of this document).
The SPO may be delegated the authority to approve any
change order which totals up to 20 percent of the project
contingency fund. Any change order that exceeds this 20
percent limit requires EPA approval. The SPO may continue
to approve such change orders until 75 percent of the
total contingency fund has been depleted. Thereafter, the
State must request EPA to provide additional funds through
an amendment to the Cooperative Agreement; this amendment
is not required, however, if the project is near comple-
tion and no additional change orders are anticipated.
Depending upon the circumstances, the Region may award
funds from its Superfund Comprehensive Accomplishments
Plan (SCAP) contingency, may request funds from the Head-
quarters SCAP contingency fund, or may request that the
Regional SCAP be amended to add new funds for this pur-
pose. In any case, the State must receive written
approval from EPA to exceed 75 percent of the project
contingency fund. A special condition regarding the draw-
down of the construction contingency fund is routinely
included in Cooperative Agreements funding construction
activities. (See Appendix F of Volume I for a sample
special condition.)
Volume II/VI-11
i
-------
9325.1-5
The RPM also is responsible for overseeing expenditure
of the contingency fund. To do so, the RPM should monitor
closely the expenditure of the contingency to compare the
remaining construction contingency fund against the change
orders to date and the progress of the project, determin-
ing whether funds will be sufficient to complete the proj-
ect. Assistance is available from the COE for this pur-
pose. If it appears that these funds will be exhausted
before the project is completed, the RPM should seek
additional money either by requesting the funds from the
Headquarters SCAP contingency fund or by preparing an
estimate of costs for the following fiscal year's SCAP
budget.
Before any change order may be approved, the State
must conduct a cost or price analysis (see 40 CFR 33. 290).
Superfund program procedures also require the State to
perform a technical and administrative analysis to
determine:
The technical accuracy of the alleged differences
in quantities and technical requirements
The allowability of the proposed amounts
Compliance with contractual and regulatory
requirements
Conformance with the approved Cooperative Agree-
ment statement of work (SOW).
The State should forward its analysis to EPA with its
quarterly report and with any requests to 1) exceed 20
percent of the construction contingency fund for an
individual request, 2) exceed 75 percent of the construc-
tion contingency for the total of all requests to date,
and/or 3) amend the Cooperative Agreement to add funds.
EPA will take this analysis into consideration when
reviewing the State's performance in managing the contract
to determine the allowability of costs under the Coopera-
tive Agreement.
C.4 Change Orders Requiring Amendments to the Superfund
Cooperative Agreement
States may rebudget existing subagreement funds in the
Cooperative Agreement to pay for necessary changes (see 40
CFR 30.700 for limitations on rebudgeting). However,
State approval of a change order does not obligate EPA to
increase the amount of a Cooperative Agreement.
Volume II/VI-12
-------
9325.1-5
If EPA determines that a necessary change is substan-
tial and is within the scope of the project, the State
must request EPA to formally amend the Cooperative Agree-
ment (40 CFR 30.700(d)). Change orders requiring amend-
ment of the Cooperative Agreement include:
Significantly changed site conditions, to the
extent that project costs are significantly
affected
Changes substantially increasing or decreasing
the funds needed to complete the project
Significant delay or acceleration of the project
schedule
Changes to the approved remedy.
Cooperative Agreement amendment procedures are found in
Chapter VIII of Volume I of this manual.
In determining whether to approve a major change to a
subagreement, States must first ascertain whether it is a
cardinal change. A cardinal change is one in which (1)
the altered subagreement attempts to purchase an item
essentially different from the one originally called for,
or (2) the cost of the changed subagreement greatly ex-
ceeds the original subagreement cost. Such a change may
be unfair to other potential contractors because they may
'.T-ve had no opportunity to compete for the subagreement;
this is a violation of EPA regulations requiring competi-
tion on all procurement of supplies and services. Al-
though it may appear that the State should terminate the
subagreement and rebid the remaining work, including the
change, under a new subagreement, such a decision should
new be made at a site on the National Priorities List
(N?L) without first consulting EPA.
C.5 Preparation of the Change Order
After evaluating the change order request and arrang-
ing for payment for the extra work, Che State must prepare
and issue a change order. To do so, the State should
develop a formal, written document that contains the fol-
lowing elements:
Identification of the change
Description of the change
Reason for the change
Volume II/VI-13
-------
9325.1-5
Difference in the unit price, if applicable
Difference in the subagreement price
Alteration of the subagreement schedule, if ap-
plicable
Effect of the change on other work elements
State and contractor approval of the change order.
If necessary, the change order also should provide for EPA
review and comment.
D. CLAIMS
Claims consist of demands or written assertions by a
contractor seeking, as a matter of right, changes to the
subagreement (e.g., additional time and/or costs) which
the State has originally rejected through the change order
process. Claims may arise at any phase of remedial re-
sponse. A voucher, invoice, or other routine request for
payment that is not in dispute when submitted is not a
claim. Such a submission, however, may be converted to a
claim if it is disputed as to liability or amount.
State failure to prevent or successfully resolve con-
tractor claims in a timely manner may greatly increase
project costs with no corresponding benefit. This is of
particular importance to States because EPA may not par-
ticipate in certain costs associated with contractor
claims. When EPA does, the share is the same as for re-
medial action (either 90/10 or 50/50). States must insti-
tute a vigorous program for claims prevention and, in
those cases where claims cannot be prevented, must take
action to ensure timely and effective claims resolution.
D.1 Causes of Claims
States may encounter claims in subagreements for ser-
vices, supplies, or construction, even when the project
has been conducted in a thoroughly satisfactory manner.
Claims may result from the contractor asserting the fol-
lowing:
Defects in plans or specifications
Differing site conditions
Volume II/VI—14
-------
9325.1-5
Inadequate construction inspection and management
Failure to promptly and fairly address contractor
grievances, requests for time extensions, or
other problems
Failure to enforce subagreement provisions on
scheduling and completion time
Failure to negotiate time extensions and/or delay
costs, if any, associated with change orders
Failure to mitigate effects of delay
Unusually severe weather conditions
Strikes
Acts of God
A State decision to stop or suspend work or
otherwise prevent the contractor from completing
work according to a previously approved schedule,
for reasons beyond the control of the contractor,
and not the fault or due to the negligence of the
contractor
Subagreement termination for reasons beyond the
control of the contractor, and not the fault or
due to the negligence of the contractor
Failure to make payment according to the terms of
the subagreement; examples include:
Making arbitrary, unsubstantiated reductions
in progress payments at substantial or final
completion of the project
Making partial payments which, in addition
to failing to comply with the subagreement,
affect the contractor's ability to make
legitimate payments to subcontractors, ma-
terials suppliers, and equipment vendors
Failure to release retainage
- Delay in actual disbursement of approved
payments beyond the normally accepted indus-
try standard.
Volume II/VI—15
-------
9325.1-5
States should take every reasonable action to ensure
prompt payment on all subagreements, since, according to
State law or their subagreements, contractors may be en-
titled to interest on earned but unpaid monies. Such
interest payments are not allowable costs under the Co-
operative Agreement and will have to be fully borne by the
State. Thus, States should take every reasonable action
to ensure prompt payment on all subagreements.
D.2 Claims Prevention
It is critical that all subagreement documents that
States prepare include precise language on requirements
for administering changes in the SOW. Many claims can be
avoided if acceptable change order language is used to
resolve disputes between the contracting parties that
arise during the course of the work. States can reduce
the probability of receiving claims, to the maximum extent
possible, by avoiding initiating changes in the work.
Changes should be directed only if they are essential to
successful completion of the subagreement; if the expected
costs of a proposed change, including indirect effect and
delay costs, are less than the expected costs of authoriz-
ing no change in the work; or if there is no feasible
alternative to performing the proposed extra work (e.g.,
awarding a separate subagreement for the proposed extra
work at a future date).
To avoid significant cost and schedule increases, EPA
strongly encourages the State to exercise effective proj-
ect management practices that will reduce the occurrence
of claims. The State must ensure that such practices are
employed throughout the project cycle. Although the State
may retain the services of other parties for certain man-
agement tasks, the State is fully responsible for the
satisfactory completion of the work. Therefore, the State
must require any contractors for construction management
services to give immediate notice of any and all unre-
solved change orders and disputes.
Some elements of effective project management which
will help prevent claims include:
Recognizing the importance of scheduling as a key
management tool by specifying that the contractor
provide a realistic and adequate project schedule
commensurate with the complexity of the project;
enforcing the schedule provisions; and requiring
periodic updates to show the adjusted project
progress and completion date
Volume II/VI—16
-------
9325.1-5
Maintaining a fully and completely documented
record of all aspects of the work, such as photo-
graphs and a daily log of work progress, person-
nel, and equipment on-site
Demonstrating a knowledge and understanding of
common sources of disputes and of situations
likely to result in claims during construction,
and exercising effective techniques to avoid such
situations
Providing timely responses to contractor requests
for direction, clarification, and adjustment
Instituting measures to ensure accurate and com-
plete plans and specifications (e.g., biddability/
constructability reviews) and holding pre-bid
conferences
Maintaining open and effective communication with
all contractors throughout the course of the re-
medial activities.
EPA, as a routine aspect of Cooperative Agreement manage-
ment, will consider funding State costs incurred in imple-
menting these practices.
D.3 Types of Claims
States must recognize that any action that changes the
subagreement scope or schedule increases the likelihood of
claims. Several types of claims are relevant to this
chapter and are discussed below; these include:
Constructive changes
Defective specifications
Inconsistent administration of warranty provisions
Impossibility of performance
Acceleration
Delay.
States also should be aware that thay cannot order a
change which is beyond the scope of the subagreement,
known as a cardinal change, without EPA review and
approval. The contractor is not bound to perform a car-
dinal change unless the subagreement for remedial work is
formally revised.
Volume II/VI—17
-------
9325.1-5
Changes resulting from written or oral orders not
designated as change orders are known as constructive
changes¦ Any such order that causes a change, whether or
not designated a change order by the State, can be treated
as a change order by the contractor after giving proper
notice of its intent to seek additional compensation under
the change order provisions. Claims often arise when
constructive changes are directed in the work but the
State does not recognize or authorize a change order. A
contractor can assert that a constructive change has been
directed if work performed according to subagreement terms
is not accepted by the State; claims can thus result.
Defective specifications, also known as errors and
omissions, can result in claims if the contractor incurs
additional costs that are not reimbursed by change order.
The contractor is liable for all damages caused by con-
tractor negligence or unacceptable performance of work
under the contract, except for errors, omissions, or other
deficiencies attributable to the subagreement documents or
to another party. The contractor, therefore, is responsi-
ble for correcting or revising any errors, omissions, or
other deficiencies on his/her part, without being provided
compensation.
If States administer any warranty provisions of sub-
agreements in a manner inconsistent with subagreement
terms, claims may arise.
Claims may result from an impossibility of performance
if restrictive subagreement language results in a situa-
tion where it is impossible for the contractor to complete
the work and the problem cannot be resolved by issuing a
change order.
If States require subagreement work to be completed on
a schedule of shorter duration than originally agreed upon
in the contract documents, or if significant change order
work is directed to be completed within the original proj-
ect schedule, additional costs will accrue to the contrac-
tor. This is known as acceleration of work and a claim
may develop if additional compensation is not paid to the
contractor by change order.
When contractors are delayed in the completion of
their work for reasons that are beyond their control and
not brought about through their own fault or negligence,
it is reasonable to extend the subagreement by a period of
Volume II/VI-18
-------
9325.1-5
time equivalent to the delay. Failure to recognize and
accommodate effects on the contractor's progress may re-
sult in claims.
D.4 Claims Resolution
When claims arise. States should implement a fair and
timely claims negotiation process in order to avoid
lengthy and costly arbitration and/or litigation. In
general, States should develop a thorough assessment
process to evaluate the merits of claims filed with the
State and the relative vulnerabilities of the parties
involved.
In pricing a claim, contractors may submit:
Unit prices
A lump sum proposal
Cost plus fee, including labor, materials, equip-
ment, travel and subsistence, job site overhead,
home office overhead, and interest on claimed
costs unpaid (the State is required to pay rea-
sonable interest, but EPA is prohibited from
sharing in these costs under CERCLA Cooperative
Agreements).
Claims for delay may be quantified in terms of:
Labor cost escalation
Materials cost escalation
Idle labor and equipment
Extended overhead
Availability charges.
In resolving claims, States should review contractor pro-
posals for adequacy and completeness, in the same manner
as detailed previously for change orders, to determine
whether the claim is reasonable.
Due to the complexity of issues usually involved in
contractor claims, States may choose to engage the ser-
vices of consultants specializing in claims management.
This is an allowable cost under a Cooperative Agreement.
However, the State must submit to EPA a request for fund-
ing claims management before it expends funds for that
purpose.
Volume II/VI-19
-------
9325.1-5
D.5 Funding of Claims Resolution
The State may request EPA to amend its Cooperative
Agreement to fund a portion of the legal, technical, and
administrative costs that the State incurs in analyzing
the merits of claims and the costs associated with negoti-
ating settlements of, or defending itself against, these
claims (costs associated with analyzing a claim prior to
litigation are considered to be part of negotiation
costs). For these costs to be eligible under the Coopera-
tive Agreement, the claim must arise from work within the
scope of the Agreement; the costs must not be incurred to
prepare documentation that the claiming contractor
developed to support the claim against the State; and the
Award Official must determine that there is significant
Federal interest in the issues of the claim.
A formal amendment to the Cooperative Agreement, spe-
cifically covering the claims defense costs, must be exe-
cuted before such costs can be incurred. To obtain an
amendment, the State must request the Award Official to
provide funding for claims negotiation and defense prior
to expending any money to resolve the claim(s). This
request should include a schedule, budget, and scope of
work required for claims management. EPA will review the
documents that the State provides and will assess whether
the claims resulted from poor project management by the
State or from other factors beyond the control of the
State or its contractor. This determination is the basis
for EPA's decision whether to fund claims negotiation and
defense costs.
If EPA decides to utilize Superfund monies for this
purpose, the Remedial Project Manager (RPM) must determine
whether funds are available in the Regional allowance to
award an amendment to the Cooperative Agreement. The
Regional SCAP contingency fund may be used to fund claims
negotiation and defense costs associated with remedial
planning. For claims negotiation and defense costs asso-
ciated with remedial action, the Region may request funds
from the Headquarters SCAP contingency fund. If possible,
the EPA Region may choose to include these costs in the
following fiscal year's SCAP budget.
D.6 Claims Negotiation
If EPA decides to fund the costs of claims negotiation
or defense, it will execute a formal amendment to the
Cooperative Agreement; procedures for amending Superfurd
Volume II/VI-20
-------
9325.1-5
Cooperative Agreements are found in Chapter VIII of Volume
I of this manual. Claims negotiation or defense may com-
mence upon execution of the amendment. If the State be-
gins any negotiation or defense before the amendment is
executed, the associated costs will not be eligible for
reimbursement by EPA. In addition, EPA may decide against
the State's application for the costs of claims negoti-
ation or defense; such a ruling would make the State ac-
countable for all such costs.
Because a claim can be a large potential liability,
States must take full control of the situation using their
legal and technical staffs to provide advice and assis-
tance, enabling the State to mount a well-organized,
thoroughly prepared resolution effort. The following
suggested actions will aid the State in resolving claims:
Take immediate steps to mitigate further costs
being incurred by the contractor, or by any other
party, due to the claims issue(s)
Perform a timely, complete, and thorough review
of the issues raised by the claim to determine
the degree of merit that each issue may have
Negotiate with the contractor on the issues in a
good faith attempt to resolve each issue
Make a renewed effort to negotiate a fair and
reasonable settlement of the meritorious issues
and a reduction or elimination of the issues
found to be without merit
Maintain a full and completely documented record
of the claim negotiation process
Provide a high degree of attention to dispute
resolution (40 CFR 33.1030 (clause 7)).
During the claim(s) resolution process, the State may
choose to consult the EPA Region for technical and legal
advice. Because the State is responsible for paying all
meritorious contractor claims, EPA must carefully evaluate
the extent of EPA's interest in awarding to the State the
costs of negotiating or defending against claims.
Volume II/VI-21
-------
9325.1-5
D.7 Settlement of Claims
Should the State decide that the contractor's claim is
meritorious and thus negotiate a settlement, the State may
request EPA to amend its Cooperative Agreement to fund the
settlement. The costs of meritorious claims are allowable
for an increase to the Cooperative Agreement, provided
that the costs are within the scope of the project; are
not caused by the State's mismanagement; and are not
caused by the State's vicarious liability for the improper
actions of others. Should the State wish to exercise this
option, the Region must determine whether the costs asso-
ciated with the claim are: (1) allowable (40 CFR 30.200),
(2) within the scope of work agreed upon, and (3) consis-
tent with the Record of Decision (ROD). Claims that alter
the cost-effectiveness analysis and selection of the
remedy may require the RPM to prepare a supplemental ROD
(see Appendix 0 to Volume I of this manual). Approval of
such a supplemental ROD must precede award of funds for a
Cooperative Agreement amendment.
To secure EPA review, the State should submit its
claims settlement proposal to the EPA Region. The RPM,
with the assistance of Regional Counsel, then will review
the proposal from several aspects:
Technical accuracy of the alleged differences in
quantities and technical requirements
Allowability of the proposed amounts
Compliance with contractual, regulatory, and
statutory requirements, including the timeliness
and format of the contractor's change order re-
quest
Conformance with the approved Cooperative Agree-
ment SOW
State performance in managing the contractor; any
costs incurred due to failure tc properly manage
the contractor are not allowable under the Co-
operative Agreement.
This review should determine the reasonableness of the
proposed settlement and the allowability of the costs
under the Cooperative Agreement. The RPM may request
technical assistance from the COE or EPA's own remedial
Volume II/VI-22
-------
9325.1-5
contractor to conduct this review. EPA review and con-
currence is not necessary for the settlement itself; how-
ever, the review will determine whether money should be
added to the Cooperative Agreement for claims settlement.
If it is determined that EPA will fund the claim, the
RPM must evaluate the availability of necessary funds in
the Region's SCAP. If allowable claims are associated
with remedial planning, the Region may choose to use its
SCAP contingency. For claims resulting from remedial
action, the Region may request funds from the Headquarters
contingency fund. If possible, the RPM may include the
funds for such claims in the following fiscal year's SCAP
budget.
* * * * *
This document, State Procurement Under Superfund
Cooperative Agreements, Volume II of the manual State
Participation in the Superfund Program, has provided
guidance on various aspects of a State procurement
program. Subjects addressed include regulatory re-
quirements, procurement of engineering services, types of
engineering services provided during remedial response,
procurement of construction services, and subagreement
administration. Guidance on other portions of the Super-
fund remedial program may be found in Volume I of this
manual. Definitions of terms used in this manual and
additional references may be found in the appendices to
this volume, which follow.
Volume II/VI-23
-------
9375.1-5
APPENDICES
-------
APPENDIX A
GLOSSARY OF TERMS
-------
9375.1-5
APPENDIX A
GLOSSARY OF TERMS
This appendix provides definitions of selected terms
used throughout the text. It is not intended to be com-
prehensive in nature; rather, it attempts to highlight
some of the terms commonly used in the Superfund remedial
program. Statutory definitions have been quoted for those
terms defined in CERCLA while other definitions have been
taken from appropriate EPA regulations, guidance, and pub-
lications .
Activity: A set of tasks that comprise a segment of the
sequence of events undertaken in determining, planning,
and conducting a response to a release.or potential re-
lease of a hazardous substance. For accounting purposes,
five activities have been defined:
Pre-remedial Activities
Remedial Investigation/Feasiblity Study
Remedial Design
Remedial Implementation
Operation and Maintenance.
Allowable Costs: Those project costs that are eligible,
reasonable, necessary, and allocable to the project; are
permitted by the appropriate Federal cost principles; and
are approved by EPA in the assistance agreement.
Amendment: A written revision to, or an expansion of,
terms included under a Cooperative Agreement, Memorandum
of Understanding, or Superfund State Contract signed by
both the Award Official and an authorized representative
of the State; other EPA-lead remedial response agreements
do not require formal amendments. An amendment is neces-
sary when the scope or dollar amount of an agreement is
significantly changed (see 40 CFR 30.200 for other situa-
tions which require amendments). The original agreement
should define situations in which amendments must be nego-
tiated.
"As-Built" Construction Schedule: The "as-built" con-
struction schedule provides the actual initiation and com-
pletion dates of all tasks performed throughout the dura-
tion of a construction project. This is compared to the
planned schedule to evalute the effects of delays or ac-
celerations on task completions.
Volume II/A-l
-------
9375.1-5
Award Official: The EPA official delegated the authority
to execute assistance agreements (grant or Cooperative
Agreement) on behalf of the Federal government. This is
the Regional Administrator for Regional Cooperative Agree-
ments; the Chief, Grants Operations Branch is the Award
Official for Headquarters Cooperative Agreements which
have not been delegated to the Regions.
Biddabi1itv/Constructabi1itv: Determination of the abil-
ity of a construction contractor to prepare a fair and
reasonable bid based upon the remedial design and speci-
fications, and then to construct the project using cur-
rently accepted construction practices and techniques
without submitting change orders or claims.
Bid Protest: A written complaint filed by a party or
parties with a direct financial interest affected by a
procurement action.
Bond: An agreement pledging surety for financial loss
caused by an act or default of the bonded party or by some
contingency.
CERCLA: The Comprehensive Environmental Response, Com-
pensation, and Liability Act of 1980 was enacted by
Congress to provide for liability, compensation, cleanup,
and emergency response for hazardous substances released
into the environment and the cleanup of inactive hazardous
waste disposal sites. It also is known as Superfund since
the act established a trust fund (Hazardous Substance Re-
sponse Fund) to financially support cleanup activities.
Change Order: A written order issued by a State, or its
designated agent, to its contractor authorizing an addi-
tion to, deletion from, or revision of, a subagreement,
usually initiated at the contractor's request.
Claim: A demand or written assertion by a coniractcr
seeking, as a matter of right, changes in subagreement
duration, costs, etc., which originally have been rejected
by the State. Claims usually are filed after the
completion of a subagreement.
Contract: The term used to describe a variety of agree-
ments or orders to acquire supplies or services for the
direct benefit of EPA (see "Subagreement").
Contractor: Any party to whom a recipient awards a sub-
agreement .
Volume II/A-2
-------
9375.1-5
Cooperative Agreement (CA): An assistance agreement
whereby EPA transfers money, property, services, or any-
thing of value to a State for the accomplishment of cer-
tain remedial activities or tasks, as authorized by
CERCLA. It assumes a substantial Federal involvement in
the State's performance of these activities. The remedial
Cooperative Agreement provides general information about
the project, such as the approved budget, and any specific
conditions applicable to the project. It also documents
any required CERCLA section 104(c)(3) assurances.
Cost Analysis: The review and evaluation of each element
of subagreement cost to determine reasonableness, alloca-
bility, and allowability.
Cost Share: The portion of allowable project costs that
the State contributes toward completing its project using
non-Federal funds. The cost share may include services as
well as cash contributions. (Sometimes referred to as
"non-Federal share" or "matching share.")
Debarment: An action taken by the Director, Grants
Administration Division under 40 CFR 32.206 to deny an
individual, organization, or-unit of government the
opportunity to participate in EPA assistance or to receive
subagreements.
Deletion: The procedure by which a site is removed from
the National Priorities List (NPL). A final technical
report is submitted by the State documenting that the cri-
teria established in the feasibility study and Record of
Decision for the site cleanup have been met, and that the
remedy is performing adequately. This final technical
report is used to determine whether the hazard associated
with the site has been reduced or eliminated to a degree
allowing its removal from the NPL.
Deviation: Official EPA permission to differ on a cer-
tain, specific point of regulation. EPA may issue a
deviation from any of its assistance-related regulations,
except for those that implement statutory and executive
order requirements. A deviation request may be made by
the State or by an EPA program office and must comply with
the requirements set forth in 40 CFR 30.1003. The
Director, Grants Administration Division, in EPA Head-
quarters, approves or disapproves deviation requests.
Direct Cost: Those costs that can be identified specif-
ically with a particular cost objective and are so
charged. (Also see "Indirect Costs.")
Volume II/A-3
-------
9375.1-5
Eligible Costs: Those costs in which Federal participa-
tion is authorized by applicable statutes. (See
"Allowable Costs".)
Facility (statutory definition): (A) any building, struc-
ture, installation, equipment, pipe or pipeline (including
any pipe into a sewer or publicly owned treatment works),
well, pit, pond, lagoon, impoundment, ditch, landfill,
storage container, motor vehicle, rolling stockr or air-
craft; or (B) any site or area where a hazardous substance
has been deposited, stored, disposed of, placed, or other-
wise come to be located; [this] does not include any con-
sumer product in consumer use or any vessel.
Feasibility Study (FS): The portion of an activity in
remedial planning involving a study to (a) evaluate alter-
native remedial actions from a technical, environmental,
and cost-effectiveness perspective; (b) recommend the most
cost-effective remedial action; and (c) prepare a con-
ceptual design, cost estimates for budgetary purposes, and
a preliminary implementation schedule for that action.
(The entire activity is known as a "remedial investiga-
tion/feasibility study.")
Force Account Work: The use of the State's own employees
or equipment for construction or construction-related
activities (including architectural and engineering
services, or for repair of, or improvement to, a facility).
Geotechnical Investigation: A study of the soils — sur-
face and subsurface — found at a site. This involves
sampling of the soils to determine characteristics such as
plasticity, gradation, moisture content, load capacity,
etc., as well as chemical analyses to evaluate the extent
of contamination of the site with hazardous wastes.
Indirect Cost: Any costs that are incurred for common
objectives and which cannot be charged directly to any
single cost objective. These costs are allocated to the
cost objectives benefited, based on a fair method of
approximation. Indirect costs also are referred to as
"overhead" or "burden costs".
Master List: EPA's central list containing the names of
individuals and other entities ineligible to participate
in EPA assistance programs because they are suspended,
debarred, or under a voluntary exclusion.
Volume II/A—4
-------
9375.1-5
Minority Business Enterprise: A minority business enter-
prise is a business which is: (a) certified as socially
and economically disadvantaged by the Small Business
Administration, (b) certified as a minority business
enterprise by a State or Federal agency, or (c) an inde-
pendent business concern which is at least 51 percent
owned and controlled by a minority group member(s).
National Contingency Plan (NCP): Officially known as the
National Oil and Hazardous Substances Pollution Contin-
gency Plan (40 CFR Part 300), this regulation outlines
responsibilities and authorities for responding to
releases into the environment of hazardous substances and
other pollutants and contaminants under the statutory
authority of CERCLA and section 311 of the Clean Water Act.
National Priorities List (NPL): A list of the highest
priority releases or potential releases of hazardous sub-
stances, based upon State and EPA Regional submissions of
candiate sites and the criteria and methodology contained
in the Hazard Ranking System, for the purpose of allo-
cating funds for remedial response. Published by EPA, the
NPL is updated periodically.
Price Analysis: The process of evaluating a prospective
price without regard to the contractor's separate cost
elements and proposed profit. Price analysis determines
the reasonableness of the proposed subagreement price
based on adequate price competition, previous experience
with similar work, established catalog or market price,
law, or regulation.
Procurement System Certification: The certification the
State signs after it has reviewed its procurement system
and compared that system to the minimum requirements of 40
CFR Part 33. The State either certifies that its procure-
ment system meets EPA's minimum standards, or that the
State's system does not meet the requirements in Part 33
and that the State will allow an EPA preaward review of
proposed procurement actions.
Profit: The net proceeds obtained by deducting all allow-
able costs (direct and indirect) from the price. (This
definition may vary from many firms' definitions of profit
because it is based on applicable Federal cost principles;
it instead may correspond to those firms' definitions of
"fee.")
Volume II/A-5
-------
9375.1-5
Project: A group of remedial response activities at a
site intended to study and/or remedy a verified or poten-
tial release of a hazardous substance which poses an
actual or potential significant threat to human health,
the environment, or real or personal property. Remedial
projects usually involve groupings of one or more of the
following activities: remedial investigation/feasibility
study, remedial design, remedial action, and/or operation
and maintenance.
Record of Decision (ROD): The ROD is a document developed
for obtaining and officially recording the selection of a
specific remedial alternative, and contains an explanation
and justification for selection of the particular alter-
native .
Remedial Action (RA): An activity in remedial response
involving actual implementation, following design, of the
selected source control and/or off-site remedial measure.
States are required to share in the costs of all RAs.
Remedial Design (RD): An activity in remedial response
where the selected remedy is clearly defined and/or speci-
fied in accordance with engineering criteria (i.e., a site
action plan, a relocation plan, or engineering drawings
and specifications) in a bid package, enabling immediate
implementation of the remedy.
Remedial Investigation (RI): The portion of an activity
in remedial planning involving an investigation to gather
the data necessary to: (a) determine the nature and
extent of problems at a site; (b) establish remedial re-
sponse criteria for the site; (c) identify preliminary
alternative remedial actions; and (d) support the tech-
nical and cost analyses of the alternatives. (The entire
activity is known as "remedial investigation/feasibility
study.")
Remedial Planning: A phase in remedial response initiated
at a site prior to implementing the remedial action.
Remedial planning encompasses the activities of remedial
investigation/feasibility study and remedial design.
States are not required to share in costs of remedial
planning at privately owned sites; at publicly owned sites
they must share in remedial planning costs only if and
when a remedial action is undertaken.
Volume II/A-6
-------
9375.1-5
Remedial Project Manager (RPM): The designated EPA Re-
gional official who coordinates, manages, and monitors
site activities covered in both EPA- and State-lead re-
sponse agreements.
Remedial Response: A series of cleanup activities
intended to provide permanent resolution of a release or
potential release of a hazardous substance from a site.
Remedial response generally includes the following
sequence of activities: remedial investigation/feasi-
bility study, remedial design, remedial action, and opera-
tion and maintenance.
Scope of Work: The element of a remedial planning agree-
ment that generally outlines the activities, tasks, and
subtasks to be undertaken at a site. The scope of work
also provides general information on the objectives of the
project.
Services: A contractor's labor, time, or efforts which do
not involve the delivery of a specific end item, other
than documents (e.g., reports, design drawings, specifi-
cations). This term does not include employee agreements
or collective bargaining agreements.
Short List: The list of firms, selected by a State, who
are judged to be qualified to perform services for a
specific scope of work. The short-listed firms are
selected based on an evaluation of statements of qualifi-
cations and experience received from interested firms j.n
response to a solicitation for services issued by the
State. Short-listed firms are allowed to continue
participating in the selection process.
Site Survey: A topographic study of a site. Depending on
the location and circumstances, surveying required may be
aerial, ground, or a combination of the two.
Small Business: A business as defined in section 3 of the
Small Business Act, as amended (15 USC 632).
State Project Officer (SPO): The designated State
official responsible for direct management of the activi-
ties covered in a Cooperative Agreement or for ensuring
that the State carries out responsibilities defined in an
EPA-lead remedial response agreement.
Volume II/A—7
-------
9375.1-5
Statement of Work (SOW): The element of a remedial re-
sponse agreement that specifies in detail the activities,
tasks, subtasks, and objectives to be performed pursuant
to that agreement. The SOW should contain salient points
regarding the background of the release or potential
release, problem definition, purpose of the work, and a
description of the services to be performed either by the
State or by an EPA contractor.
Subagreement: A written agreement between an EPA recip-
ient and another party (other than another public agency)
or between the recipient's contractor and the contractor's
first tier subcontractor.
Superfund Comprehensive Accomplishments Plan (SCAP): A
document prepared by the EPA Regional office incorporating
cost estimates for the remedial activities to be accom-
plished throughout a given fiscal year.
Suspension: An action taken by the Director, Grants
Administration Division under 40 CFR 32.300 to temporarily
disqualify an individual, organization, or unit of govern-
ment from receiving any EPA assistance or subagreement.
Task: A discrete piece of work that addresses a single
objective specified by a statement of work for planning,
evaluating, or implemeting a response action: e.g.,
hydrogeological study, hazardous waste characterization,
alternative analysis, construction of a fence, or instal-
lation of a leachate control system.
Voluntary Exclusion: A term of settlement, in lieu of a
finding for debarment, under which a person or entity
agrees to abstain voluntarily from participation in
EPA-assisted projects.
Women's Business Enterprise (WBE): A business which is
certified as such by a State or Federal agency, or which
meets the following definition: A WBE is an independent
business concern which is at least 51 percent owned by a
woman or women who also control and operate it. Deter-
mination of whether a business is at least 51 percent
owned by a woman or women shall be made without regard to
community property laws. For example, an otherwise quali-
fied WBE which is 51 percent owned by a married woman in a
community property State will not be disqualified because
her husband has a 50 percent interest in her share. Simi-
larly, a business which is 51 percent owned by a married
Volume II/A-8
-------
9375.1-5
man and 49 percent owned by an unmarried woman will not
become a qualified WBE by virtue of his wife's 50 per-
cent interest in his share of the business (40 CFR 33.005
(b)).
Work Plan: The detailed listing of all activities and
tasks to be conducted under a remedial response agree-
ment. It should also include a schedule for completion of
the work and show the outputs anticipated.
Volume II/A-9
-------
APPENDIX B
REFERENCES
-------
9375.1-5
APPENDIX B
REFERENCES
A.	PROCUREMENT - GENERAL
Federal Acquisition Regulation, issued by Department of
Defense, General Services Administration, and National
Aeronautics and Space Administration, April 1, 1984.
Code of Federal Regulations, Title 40 - Protection of the
Environment.
Schnitzer, Paul A., U.S. Government Contract Bidding, 2nd
ed., Federal Publications Inc., 1982.
B.	PROCUREMENT OF ARCHITECTURAL/ENGINEERING SERVICES
Acret, James, Architects & Engineers: Their Professional
Responsibilities, Shepard's Inc., Division of McGraw-
Hill, 1977.
American Consulting Engineers Council, A Guide to the
Procurement of Architectural and Engineering Services,
American Consulting Engineers Council, Washington, D.C.,
1979.
American Consulting Engineers Council, A Manual of
Practice for Consulting Engineering, American Consulting
Engineers Council, Washington, D.C., 1977.
American Society of Civil Engineers, Consulting
Engineering - A Guide for the Engagement of Engineering
Services, American Society of Civil Engineers, New York,
NY, 1975.
NSPE/PEPP, Guidelines for Development of Architect/
Engineer Quality Control Manual, NSPE, 1977.
U.S. EPA, Guidance on Feasibility Studies Under CERCLA,
U.S. EPA, Washington, D.C., June 1985.
U.S. EPA, Guidance on Remedial Investigations Under CERCLA,
U.S. EPA, Washington, D.C., June 1985.
Volume II/B-l
-------
9375.1-5
C. PREPARATION OF CONTRACT DOCUMENTS
Abbett, Robert W., Engineering Contracts and
Specifications, 4th ed., John Wiley & Sons, Inc., New
York, NY, 1963.
Ayers, Chesley, Specifications for Architecture,
Engineering, and Construction, McGraw-Hill, USA, 1975.
Construction Specifications- Institute, Manual of Practice,
CSI, various dates, looseleaf.
Dunham, Clarence and Robert Young, Contracts,
Specifications and Law for Engineers, McGraw-Hill, New
York, NY, 1971.
Edwards, H. Griffith, Specifications, 2nd ed., D. Van
Nostrand Company, Inc., Princeton, NJ, 1961.
Engineers' Joint Contract Documents Committee, Standard
Forms of Agreement, published jointly by National Soci-
ety of Professional Engineers, American Consulting Engi-
neers Council, and American Society of Civil Engineers,
Washington, D.C., 1983:
o Standard Form of Agreement Between Owner and Engineer
for Professional Service (1979 ed.)
o Suggested Listing of Duties, Responsibilities, and
Limitations of Authority of Resident Project Represen-
tative (1983 ed.)
o Standard Form of Letter Agreement Between Owner and
Engineer for Professional Services (1979 ed.)
o Standard General Conditions of the Construction Con-
tract (1983 ed.)
o Standard Form of Agreement Between Owner and Contrac-
tor on the Basis of a Stipulated Price
(1983 ed.)
o Standard Form of Agreement Between Owner and Contrac-
tor on the Basis of Cost-Pius (1983 ed.)
o Change Order (1983 ed.)
o Application for Payment (1983 ed.)
Volume II/B-2
-------
9375.1-5
o Work Directive Change (1983 ed.)
o Commentary on Agreements for Engineering Services and
Contract Documents by John R. Clark, Esq. (1981 ed.)
o Commentary on 1983 Edition of Construction Related
Documents by John R. Clark, Esq. (1983 ed.)
o Standard Form of Agreement Between Engineer and Archi-
tect for Professional Services (1980 ed.)
o Cross Reference Between EJCDC Standard General Condi-
tions of the Construction Contract (1910-8, 1983 ed.)
and AIA General Conditions of the Contract for Con-
struction (No. A201, Aug. 1976 ed.) (1983 ed.)
o Standard Form of Agreement Between Owner and Project
Manager for Professional Services (1977 ed.)
o Guide to the Preparaton of Supplementary Conditions
(1983 ed.)
o Suggested Bid Form and Commentary for Use (1983 ed.)
o Standard Form of Agreement Between Owner and Engineer
for Study and Report Professional Services (1980 ed.)
o Standard Form of Procurement Agreement Between Owner
and Contractor (1981 ed.)
o Procurement General Conditions (1981 ed.)
o Guide to the Preparation of Procurement Supplemental
Conditions (1981 ed.)
1
o Instruction to Bidders for Procurement Contracts
(1981 ed.)
o Commentary on Procurement Documents by John R. Clark,
Esq. (1981 ed.)
o Guide to Preparation of Instructions to Bidder
(1983 ed.).
Meier, Hans W., Construction Specifications Handbook, 2nd
ed., Prentice-Hall, 1978, looseleaf.
Volume II/B-3
-------
9375.1-5
Rosen, Harold J., Construction Specifications Writing,
Wiley-Interscience, New York, NY, 1974.
U.S. EPA, Superfund Remedial Design and Remedial Action
Guidance, Washington, D.C., February 1985.
D. CONTRACT LAW
Cohen, Henry A., Public Construction Contracts and the
Lav, McGraw-Hill, New York, NY, 1961.
Dunham, Clarence W., Robert D. Young, and Joseph T.
Bockrath, -Contracts, Specifications, and Law for Engi-
neers , 3rd ed., McGraw-Hill, 1979.
Hohns, H. Murray, Preventing and Solving Construction
Contract Disputes, Van Nostrand Reinhold Co., New York,
NY, 1979.
Howell, Edward B. and Richard P. Howell, Untangling the
Web of Professional Liability, Risk Analysis and Re-
search Corp., 1976.
Jabine, William, Case Histories in Construction Law,
Cahners Books International, Inc., Boston, MA, 1973.
Jessup, W. Edgar, Jr. and Walter E. Jessup, Law and
Specifications for Engineers and Scientists, Prentice-
Hall, Inc., Englewood Cliffs, NJ, 1963.
Jones, Harry W., E. Allan Farnsworth, and William F.
Young, Jr., Cases and Materials on Contracts, the Foun-
dation Press, Inc., Brooklyn, NY, 1965.
Pierce, Jotham D., Jr., Construction Contracts 1977 Course
Handbook, Practicing Law Institute, 1977.
Pierce, Jotham D., Jr., Construction Contracts in the
80 ' s, Practicing Law Institute, 1980.
Simon, Michael S., Construction Contracts and Claims,
McGraw-Hill, 1979.
Stokes, McNeill, Legal Considerations of Construction
Subcontracts, Stokes, Boyd, and Shapiro, 1975.
Stokes, McNeill, Construction Law in Contractors'
Language, McGraw-Hill, 1977.
Volume II/B-4
-------
9375.1-5
Sweet, Justin, Legal Aspects of Architecture, Engineering,
and the Construction Process, 2nd ed., West, 1977.
Tomson, Bernard and Norman Coplan, Architectural and
Engineering Law, 2nd ed., Van Nostrand Reinhold Co., New
York, NY, 1967.
Vaughn, Richard C., Legal Aspects of Engineering, 3rd ed.,
Kendall-Hunt, 1975.
Walker, Nathan, Edward N. Walker, and Theodor K.
Rohdenburg, Legal Pitfalls in Architecture, Engineering,
and Building Construction, 2nd ed., McGraw-Hill, 1979.
Legal Briefs for Architects, Engineers, and Contractors,
McGraw-Hill, Biweekly.
E.	INSURANCE AND BONDS
Derk, Walter T., Insurance for Contractors, 4th ed., Fred
S. Jones Co., 1980.
Rothschilf, Bernard, Construction Bonds and Insurance
Guide, American Institute of Architects, Washington,
D.C., 1973.
F.	NEGOTIATION/ECONOMIC DECISION-MAKING
Taylor, George A., Managerial and Engineering Economy:
Economic Decision-Making, 2nd ed., D. Van Nostrand Com-
pany, New York, NY, 1975.
G.	CONSTRUCTION MANAGEMENT
Clough, Richard H., Construction Contracting, John W.
Wiley, 1981.
Clough, Richard H. and Glenn A. Sears, Construction
Project Management, John W. Wiley, 1978.
Cushman, Robert F., ed., McGraw-Hill Construction Business
Handbook, McGraw-Hill, 1978.
Cushman, Robert F., Michael S. Simon, and McNeill Stokes,
The Construction Industry Formbook, Shepard's Inc., Di-
vision of McGraw-Hill, 1979.
Volume II/B-5
-------
9375.1-5
Douglas, Clarence, Construction Management, Prentice-Hall,
Englewood Cliffs, NJ, 1969.
Fisk, Edward R., Construction Project Administration, 2nd
ed., John W. Wiley, 1978.
Gorman, James E., Simplified Guide to Construction
Management for Architects and Engineers, Cahners Books
International, Inc., 1976.
Kavanagh, T.C., J.J. O'Brien, and F. Muller, Construction
Management - A Professional Approach, McGraw-Hill, USA.
McMahon, Leonard A., 1985 Dodge Guide to Public Works and
Heavy Construction Costs, McGraw-Hill, 1984.
O'Brien, James J., CPM in Construction Management, 3rd
ed., McGraw-Hill, USA.
O'Brien, James J., and Robert G. Zilly, ed., Contractor's
Management Handbook, McGraw-Hill, New York, NY.
Parker, A.D., D.S. Barrie, and R.M. Synder, Planning and
Estimating Heavy Construction, McGraw-Hill, USA, 1984.
Peurifoy, R.L., Construction Planning, Eguipment, and
Methods, 2nd ed., McGraw-Hill, USA, 1970.
U.S. General Services Administration, Using Construction
Management for Public and Institutional Facilities, Pub-
lic Technology Inc., Washington, D.C., March 1976.
The Construction Contractor, Federal Publications Inc.,
biweekly.
H. CHANGE ORDERS
New Jersey Department of Environmental Protection, U.S.
Army Corps of Engineers - New York District, U.S. EPA -
Region II, Guide for Preparation and Processing of Con-
tract Modifications.
U.S. EPA - Office of Water Programs Operations, Management
of Construction Change Orders, U.S. EPA, Washington,
D.C., 1983.
Volume II/B-6
-------
9375.1-5
I. CLAIMS
Engineering News Record, 1984 Spring Conference on
Construction Claims and Disputes for Owners, Contrac-
tors, Architects, and Engineers, Construction Education
Management Corp. and Engineering News Record, 1984.
Gavin, Donald G. and Joseph M. Zorc, Water Pollution
Construction Claims - Course Manual, Federal Publica-
tions, Inc., 1982.
O'Brien, James J., Construction Delay: Responsibilities,
Risks and Litigation, Cahners Books International, Inc.,
1976.
Richter, Irv and Roy S. Mitchell, Handbook of Construction
Law and Claims, Reston Publishing Company, Inc., Reston,
VA, 1982.
Rubins, R.A., S.D. Guy, A.C. Maevis, and V. Fairweather,
Construction Claims - Analysis, Presentation, Defense,
Van Nostrand Reinhold Co., New York, NY, 1983.
Simon, Michael S., Construction Contracts and Claims,
McGraw-Hill, USA, 1979.
U.S. EPA - Region V, Prevention and Resolution of Claims
in EPA Funded Projects - Seminar Workbook, Project Man-
agement Associates, Inc., Ann Arbor, Michigan, 1983.
Volume II/B-7
-------
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
OFFICE O*
SOLID WASTE AND EMERGENCY ftES'ONSt
MEMORANDUM
SUBJECT: Two-Step Formal Advertising
FROM: Russel H. Wyer, Director
Hazardous Site Control Division
TO:
Regional Superfund Branch Chiefs
Regional Grants Management Contacts
The Agency's regulation governing procurement under Superfund
Cooperative Agreements with the States, 40 CFR Part 33, require
the use of the formal advertising method for procurement'of
construction. The traditional formal advertising method requires
a complete, adequate and realistic specification. That 1s, both
the technical requirements and the means of satisfying those
requirements can be specified.
As the proqram moves Into the use of complex Innovative and
alternative technologies, a method of procurement other than
traditional 'forma 1 advertising may be appropriate. An acceptable
method 1s "Two-Step Formal Advertising." The two-step method may
be used when it is possible to prepare a performance based
specification to describe the requirements but Impractical to
initially prepare detailed specifications to support an award
based on price.
The first step 1s to solicit a "Request for Technical
Proposals" requiring the submission of an unpriced description of
what the bidder will offer to meet the performance specifications.
Each offer 1s then reviewed, possibly discussed with the offeror
and evaluated. This step 1s then followed by an "Invitation for
Bids" .requesting prices from those bidders whose proposals have
been determined to be technically acceptable under the criteria
set forth 1n the first solicitation.
-------
-2-
The two-step formal advertising method is permitted under EPA's
procurement regulation governing procurement under cooperative
agreements, 40 CFR Part 33, as well as Part 14 of the Federal
Acquisition Regulation. The attachment 1s a detailed explanation
of the two-step method.
We Intend to add the two-step method to Volume II of the
State Participation 1n the Superfund Program Manual 1n the future.
In the meantime, please inform your States of the avallabl11ty
and acceptability of the two-step formal advertising procurement
method.
cc: K. Holland, 06C
R. Johnson, GAD
Regional Coordinators
-------
TWO-STEP FORMAL ADVERTISING
What is the two-step'method?
Two-step formal advertising is a method of contracting designed
to obtain the benefits of formal advertising when adequate
specifications are not available. An objective 1s to permit the
development of a sufficiently descriptive and not unduly restrictive
statement of the recipient's requlrements, including an adequate
technical data package, so that subsequent procurements may be
made by conventional formal advertising. This method is especially
useful In procurements requiring technical proposals, particularly
those for complex projects. It 1s conducted 1n two steps:
(a)	Step one consists of the request for, submission,
evaluation, and (if necessary) discussion of a technical
proposal. No pricing is Involved. The objective is to
determine the acceptability of the offer. As used in this
context, the word "technical" has a broad connotation and
Includes, among other things, the engineering approach and
special testing techniques. It 1s the proper step for
clarlficatlon of questions relating to technical requirements.
(b)	Step two Involves the submission of sealed priced bid;
by those who submitted acceptable technical proposals in
step one. Bids submitted in step two are evaluated and the
awards made in accordance with 40 CFR 33.430.
When to use 11?
The two-step method may be used when:
1.	Available specifications are not definite or complete
or may be too restrictive to permit full and free competition
without technical evaluation, and any necessary discussion,
of the technical aspects of the requirement to ensure mutual
understanding between each source and the recipient.
2.	Definite criteria exist for evaluating technical
proposals.
3.	More than one technically qualified source is expected
to be available.
4.	A fixed-price contract will be used.
-------
Procedures for using the two-step method.
Step One - (Obtaining and evaluating technical proposals)
1.	Prepare a public notice and solicit a request for
technical proposals.
2.	Include in the request:
A.	A statement of the intent to use the two-step
formal advertising method.
B.	Description of the work required.
C.	The requirements of the technical proposal.
0.	The criteria and relative weight of each for
evaluating technical proposals.
E.	A statement that the technical proposals shall not
Include prices or pricing information.
F.	The date and hour by which the proposals must
be submitted.
G.	A statement that only those bids whose technical
proposals are acceptable either Initially or as a
result of discussions will be considered.
H.	A statement that:
(1)	a. the recipient may make a final determi-
nation regarding the proposal's accepta-
bility solely on the basis of the proposal
as submitted; and
b. may proceed with the second step without
requesting further information from any
bidder; or
(2)	the recipient may request additional information
from bidders.
1.	A statement that bidders with unacceptable proposals
will be notified.
J. A statement whether bidders may submit more than
one technical proposal.
K. Any other Information on requirements tor performing
the work that may assist bidders 1n determining whether
to submit a proposal.
-------
3.	Upon receipt of proposals, the recipient must:
A.	Remove any reference to cost or price, and
B.	Sa f egu ard'the proposals from unauthorized disclosure.
4.	Set a deadline for bidders to submit additional
i nformation.
5.	Set a deadline for completing the evaluation of proposals.
6.	Evaluate the proposals based on the criteria stated in
the request. Categorize proposals as: acceptable, unaccep-
table or reasonably susceptible of being made acceptable if
clarifying or supplementing information was requested.
7.	Proceed with step two if there are sufficient acceptable
proposals to ensure adequate price competition or request
bidders whose proposals were categorized as "reasonably
susceptible of being made acceptable* to submit additional
clarifying or supplementing information. (Identify the
nature of the deficiencies in the proposal or the nature of
the additional information required and arrange discussions
if necessary.)
B. Notify bidders of proposals that you determine unacceptai
and the basis for that determination.
Step Two - (Obtaining and evaluation of sealed priced bids)
Follow formal advertising procedures except that invitations
for bids are:
1.	Issued only to those offerors submitting acceptable
technical proposals 1n step one; and
2.	Prominently state that the bidder shall comply with the
specifications and the bidder's technical proposal.
-------
3
-------
§ 32-500
40 CFR Ch. I (7-1-86 Edition)
(1)	The names of those persons
whom EPA has debarred or suspended
under this part;
(2)	The basis of authority lor such
action:
<3) The period of debarment or sus-
pension. including the expiration
date(s): and
(4) The name of the debarring or
suspending agency, where EPA's de-
barment or suspension is based on de-
barment or suspension by another
Federal agency.
(c) The Master List shall include a
separate section listing persons volun-
tarily excluded from participation in
EPA programs.
§ 32.500 Implementation.
(a)	The Director shall send to each
Regional Counsel and publish in the
Federal Register an updated copy of
the Master List at least each calendar
quarter during the year.
(b)	The list shall be made available
to anyone for inspection to determine
a person's eligibility for award.
(c)	Award of EPA assistance or suba-
greements shall not be made to any
person on the Master List.
-------
Environmental Protection Agency
§33.001
Sec.
33.810 Nonapplicable	subagreement
clauses.
33.815 Nonapplicable procurement provi-
sions.
33.820 Additional procurement require-
ments.
Subpart E—-Requirements for Recipient* of Re-
medial Action Cooperative Agreements
Under the Comprehensive Environmental Re-
sponse, Compensation, and Liability Act of
1980
33.905 Applicability and scope of this sub-
part.
33.910 Preference for formal advertising.
33.915 Award official approval.
Subpart F—Subagreement Provisions
33.1005 Applicability and scope of this sub-
part.
33.1010 Requirements for subagreement
clauses.
33.1015	Subagreement provisions clause.
33.1016	Labor standards provisions.
33.1019	Patents, data and copyrights
clause.
33.1020	Violating facilities clause.
33.1021	Energy efficiency clause.
33.1030 Model subagreement clauses.
Subpart C Protests
33.1105 Applicability and scope of this sub-
part.
33.1110 Recipient protest procedures.
33.1115 Protest appeal.
33.1120 Limitations on protest appeals.
33.1125 Piling requirements.
33.1130 Review of protest appeals.
33.1140 Deferral of procurement action.
33.1145 Award official's review.
Appendix A—Procedural Requirements
for Recipients Who Do Not Certify
Their Procurement Systems, or for
Recipients Who Have Their Procure-
ment Certifications Revoked by EPA
Authority: 7 U.S.C. 135 et seq.: 15 U.S.C.
2601 et seq.; 33 U.S.C. 1251 et seq.; 42 U.S.C.
241. 242b, 243. 246. 300j-l. 300J-2. 300j-3.
1857 et seq., 6901 et seq.; and 42 U.S.C. 9601
et seq.
Source: 48 FR 12926, Mar. 28, 1983. unless
otherwise noted.
§ 33.001 Applicability and scope of this
part.
(a) This part applies to all assistance
agreements awarded on or after the
effective date of this part. For assist-
ance agreements awarded before the
effective date, this part will apply only
to those procurement actions initiated
by the recipient on or after the date
the recipient complies with the sel
certification requirements in § 33.11
of this part.
(b)	This part:
(1)	Describes EPA's procurement
system evaluation process.
(2)	Identifies the minimum require-
ments for the procurement of sup-
plies. services, and construction under
EPA assistance agreements.
(3)	Identifies an additional specifica-
tion requirement for procurement
under assistance agreements for the
construction of treatment works
awarded under 40 CFR Part 35, Sub-
parts E and I.
(4)	Identifies the procurement
standards that institutions of higher
education and other nonprofit organi-
zations must follow.
(5)	Identifies the provisions that re-
cipients of EPA assistance agreements
must include in their subagreements.
(6)	Describes the procedures that
EPA will use to handle protest appeals
concerning the award of a subagree-
ment by the recipient of an EPA as-
sistance agreement.
(c)	This part does not apply to work
beyond the scope of the project fc
which an assistance agreement i
awarded (i.e.. ineligible work).
(d)	This part does not apply to ex-
penses for services for which the recip-
ient will receive an allowance or a po-
tential recipient will receive an ad-
vance of an allowance under 40 CFR
Part 35. Subpart I.
(e)	This part supplements the re-
quirements in:
(1)	40 CFR Part 30 "General Regula-
tion for Assistance Programs." and
(2)	40 CFR Part 32. "Debarments
and Suspensions under EPA Assist-
ance Programs."
(f)	The following types of recipients
must comply with the specified sub-
parts in this part:
(1)	Recipients of assistance agree-
ments for the construction of treat-
ment works awarded under 40 CFR
Part 35, Subparts E and I. must follow
the requirements in Subparts A, B. C.
F and G.
(2)	Recipients of remedial action co-
operative agreements under the Com-
prehensive Environmental Response,
Compensation. Liability Act of 198r
317
-------
§ 33.005
40 CFR Ch. I (7-1-86 Edition)
(Superfund 42 U.S.C. 6901 et seq.)
must follow the requirements in Sub-
parts A. B, E. F and Q.
(3) State and local government re-
cipients for other than construction
grants and CERCLA remedial action
cooperative agreements must follow
the requirements in Subparts A, B, F
and G.
(4> Institutions of higher education,
hospitals, and other nonprofit organi-
zations must follow the requirements
in Subparts A. B, D and G.
(g)	In the construction of treatment
works program under the Clean Water
Act (33 U.S.C. 1251 et. seq.), it is EPA's
policy to delegate determinations on
individual projects to State agencies to
the maximum extent possible (see 40
CFR Part 35, Subpart F). This part
uses the term "award official." To the
extent that the award official for a
treatment works assistance agreement
delegates responsibility for determin-
ing compliance with the requirements
of this part (except for §33.115 "Pro-
curement system review," and Subpart
G "Protests") to a State agency under
a delegation agreement (40 CFR
35.1130), the term "award official"
may be read "State agency."
(h)	This part applies to a grant
awarded under 40 CFR Part 35 Sub-
part E only if the recipient elects to
follow the requirements in this part. If
the recipient of a Subpart E grant
does not elect to follow the require-
ments in this part, it is subject to the
procurement requirements in 40 CFR
Subpart E.
(48 FR 12926. Mar. 28. 1983: 48 FR 30364.
July 1. 1983]
§ 33.005 Definitions.
(a)	Words and terms not defined
below shall have the meaning given to
them in 40 CFR Part 30 and Part 35.
(b)	As used in this part, the follow-
ing words and terms mean:
Architectural or engineering (A/E)
services. Consultation, investigations;
reports, or services for design-type
projects within the scope of the prac-
tice of architecture or professional en-
gineering as defined by the laws of the
State or territory in which the recipi-
ent is located.
Construction. Erection, building, al-
teration, remodeling, improvement, or
extension of buildings, structures or
other property. Construction also in-
cludes remedial actions in response to
a release, or a threat of a release, of a
hazardous substance into the environ-
ment as determined by the Compre-
hensive Environmental Response,
Compensation, and Liability Act of
1980.
Contractor. Any party to whom a re-
cipient awards a subagreement.
Cost analysis. The review and eval-
uation of each element of subagree-
ment cost to determine reasonable-
ness, allocability and allowability.
Intergovernmental Agreement Any
written agreement between units of
government under which one public
agency performs duties for or in con-
cert with another public agency using
EPA assistance. This includes substate
and interagency agreements.
Minority business enterprise. A mi-
nority business enterprise is a business
which is: (1) Certified as socially and
economically disadvantaged by the
Small Business Administration, (2)
certified as a minority business enter-
prise by a State or Federal agency, or
(3) an independent business concern
which is at least 51 percent owned and
controlled by minority group
member(s). A minority group member
is an individual who is a citizen of the
United States and one of the follow-
ing:
(i> Black American;
(ii)	Hispanic American (with origins
from Puerto Rico, Mexico, Cuba,
South or Central America);
(iii)	Native American (American
Indian. Eskimo. Aleut, native Hawai-
ian), or
(iv)	Asian-Pacific American (with
origins from Japan. China, the Philip-
pines. Vietnam, Korea. Samoa. Guam,
the U.S. Trust Territories of the Pacif-
ic, Northern Marianas. Laos. Cambo-
dia, Taiwan or the Indian subconti-
nent).
Price analysis. The process of evalu-
ating a prospective price without
regard to the contractor's separate
cost elements and proposed profit.
Price analysis determines the reason-
ableness of the proposed subagree-
ment price based on adequate price
competition, previous experience with
318
-------
Environmental Protection Agency
similar work, established catalog or
market price, law, or regulation.
ProfiL The net proceeds obtained by
deducting all allowable costs (direct
and indirect) from the price. (Because
this definition of profit is based on ap-
plicable Federal cost principles, it may
vary from many firms" definition of
profit, and may correspond to those
firms' definition of "fee.")
Services. A contractor's labor, time,
or efforts which do not involve the de-
livery of a specific end item, other
than documents, (e.g., reports, design
drawing, specifications). This term
does not include employment agree-
ments or collective bargaining agree-
ments.
Small business. A business as defined
in section 3 of the Small Business Act.
as amended (15 U.S.C. 632).
SubagreemenL A written agreement
between an EPA recipient and another
party (other than another public
agency) and any lower tier agreement
for services, supplies, or construction
necessary to complete the project. Su-
bagreements include contracts and
subcontracts for personal and profes-
sional services, agreements with con-
sultants, and purchase orders.
Supplies. All property, including
equipment, materials, printing, insur-
ances. and leases of real property, but
excluding land or a permanent inter-
est in land.
Women's business enterprise. A
women's business enterprise is a busi-
ness which is certified as such by a
State or Federal agency, or which
meets the following definition: A
women's business enterprise is an inde-
pendent business concern which is at
least 51 percent owned by a woman or
women who also control and operate
it. Determination of whether a busi-
ness is at least 51 percent owned by a
woman or women shall be made with-
out regard to community property
laws. For example, an otherwise quali-
fied WBE which is 51 percent owned
by a married woman in a community
property state will not be disqualified
because her husband has a 50 percent
interest in her share. Similarly, a busi-
ness which is 51 percent owned by a
married man and 49 percent owned by
an unmarried woman will not become
a qualified WBE by virtue of his wife's
§33.110
50 percent interest in his share of the
business.
Subpart A—Procurement System
Evaluation
§33.105 Applicability and scope of this
subpart
(a)	This subpart applies to all recipi-
ents of EPA assistance agreements.
(b)	For procurements involving EPA
funds, recipients shall use their own
procurement policies and procedures if
those policies and procedures reflect
applicable Federal, State, and local
laws and regulations, and at least meet
the requirements set forth in this
part.
(c)	This subpart describes when EPA
will review the recipient's procure-
ment practices.
33.110 Applicant and recipient certifica-
tion.
(a)	It is the applicant's and recipi-
ent's responsibility to evaluate its own
procurement system and to determine
whether its system meets the applica-
ble requirements in this part (see
§ 33.001).
(b)	After evaluating its procurement
system, the applicant or recipient will
complete the "Procurement System
Certification" (EPA Form 5700-48).
The applicant or recipient will either
certify that:
(1)	Its system will meet the intent of
all the requirements in this part
before any procurement action with
EPA assistance is undertaken, or
(2)	Its current system does not meet
the intent of the requirements of this
part and, therefore, the applicant will
follow the requirements of 40 CFR
Part 33 and allow EPA preaward
review of proposed procurement ac-
tions that will use EPA funds. The ad-
ditional requirements for EPA review
and approval are contained in Appen-
dix A to this part.
(c)	The applicant must submit the
signed certification form with the as-
sistance application to the award offi-
cial.
(d)	The certification will be valid for
two years or for the length of the
project period specified in the assist-
ance agreement, whichever is greater.
319
-------
§33.115
40 CFR Ch. I (7-1-66 Edition)
unless the recipient substantially re-
vises its procurement system or the
award official determines that the re-
cipient is not following the intent of
the requirements in this part (see
§ 33.115(b)). If the recipient substan-
tially revises its procurement system,
the recipient must re-evaluate its
system and submit a revised EPA
Form 5700-48.
(e) Even when a recipient certifies
its procurement system, the EPA
award official retains the authority
stated in:
(1)	Section 33.210(h) "Recipient's
procurement responsibilities," which
requires the recipient to receive the
award official's prior written approval
if the recipient wants to use an inno-
vative procurement method.
(2)	Section 33.211 "Recipient report-
ing requirements," which requires the
award official to notify the Depart-
ment of Labor of certain construction
subagreement awards, and obtain all
bid or offer tabulations,
(3)	Section 33.605(d) "Noncompeti-
tive negotiation procurement
method." to authorize a noncompeti-
tive award,
(4)	Section 33.820(b) "Additional
procurement requirements," which re-
quires the award official's prior ap-
proval for a sole source award over
$10,000 by an institute of higher edu-
cation or other nonprofit organization.
(5)	Section 33.915 "Award official ap-
proval," which requires the award offi-
cial to approve the recipient's use of a
procurement method other than
formal advertising for a Superfund re-
medial action construction award, and
(6)	Subpart G "Protests."
(48 FR 12926, Mar. 28. 1983; 48 PR 30364,
July 1. 1983]
S 33.115 Procurement system review.
(a)	EPA will not substitute its judg-
ment for that of the recipient unless
the matter is primarily a Federal con-
cern.
(b)	Even if a recipient has a certified
procurement system, EPA reserves the
right to review a recipient's procure-
ment system or procurement action
under an assistance agreement:
(1) To determine if the recipient is
following the procurement require-
ments in this part; or
(2) When there is sufficient reason
to believe that the recipient's system
may be unacceptable based on:
(i> Information concerning the
review or certification of the recipi-
ent's procurement system or actions
by other Federal agencies or Congress;
(ii)	Information from the recipient's
cognizant audit agency;
(iii)	Information from State agencies
and organizations independent of the
recipient's procurement activity;
(iv)	Recipient responses to the pro-
curement system certification form;
(v)	Previous EPA experience with
the recipient; or
(vl) Information from contractors or
prospective contractors.
(c)	If the award official determines
that the recipient is not following the
procurement requirements it certified
it would follow, the award official
shall revoke the recipient's certifica-
tion and:
(1)	Require that the recipient follow
the procurement requirements in this
part, including Appendix A. for future
procurement actions and. if appropri-
ate, 	
(2)	Apply the sanctions in 40 CFR
Part 30.
(d)	The recipient may recertify its
procurement system if it shows the
award official that it has corrected the
procurement deficiencies noted by the
award official, and the award official
accepts the recertification.
Subpart B—Procurement
Requirement*
§33J!05 Applicability and scope of this
subpart.
This subpart contains:
(a)	The recipient's and EPA's re-
sponsibilities. and
(b)	The minimum procurement
standards for each recipient's procure-
ment system.
§ 32.210 Recipient responsibility.
(a) The recipient is responsible for
the settlement and satisfactory com-
pletion in accordance with sound busi-
ness judgment and good administra-
tive practice of all contractual and ad-
ministrative issues arising out of suba-
greements entered into under the as-
320
-------
Environmental Protection Agency
sistance agreement. This includes issu-
ance of invitations for bids or requests
for proposals, selection of contractors,
award of subagreements, settlement of
protests, claims, disputes and other re-
lated procurement matters.
(b)	The recipient shall maintain a
subagreement administration system
to assure that contractors perform in
accordance with the terms, conditions
and specifications of their subagree-
ments.
(c)	The recipient shall review its pro-
posed procurement actions to avoid
purchasing unnecessary or duplicative
items.
(d)	The recipient shall consider con-
solidating its procurement or dividing
it into parts to obtain a more economi-
cal purchase.
(e)	Where appropriate, the recipient
shall make an analysis of lease versus
purchase alternatives in its procure-
ment actions.
(f)	A recipient of a remedial action
cooperative agreement awarded under
the Comprehensive Environmental
Response, Compensation, and Liability
Act of 1980 must obtain the EPA
award official's approval to use a pro-
curement method other than the
formal advertising method for a con-
struction award (see Subpart E).
(g)	A recipient may request technical
and legal assistance from the award
official for the administration and en-
forcement of any subagreement
awarded under this part. However,
such assistance does not relieve the re-
cipient of its responsibilities under
this part.
(h)	A recipient may use innovative
procurement methods or procedures
only if it receives the award officials'
prior written approval.
[48 FR 12926. Mar. 28. 1983; 48 FR 30364.
July 1. 1983]
§33.211 Recipient reporting requirements.
Recipients shall notify the award of-
ficial. in writing, of each construction
subagreement which has or is expect-
ed to have an aggregate value over
$10,000 within a 12-month period. The
recipient shall notify the award offi-
cial within ten (10) calendar days after
the award of each construction suba-
greement. The notice shall include:
§ 33.225
(a)	Name, address, telephone
number and employee identification
number of the construction contrac-
tor.
(b)	Amount of the award,
(c)	Estimated starting and comple-
tion dates,
(d)	Project number, name and site
location of the project, and
(e)	Copy of the tabulations of bids or
offers and the name of each bidder or
offeror.
[48 FR 12926. Mar. 28. 1983: 48 FR 30364.
July 1, 1983]
§ 33.220 Limitation of subagreement
award.
(a)	The recipient shall award suba-
greements only to responsible contrac-
tors that possess the potential ability
to perform successfully under the
terms and conditions of a proposed
procurement. A responsible contractor
is one that has:
(1)	Financial resources, technical
qualifications, experience, organiza-
tion and facilities adequate to carry
out the project, or a demonstrated
ability to obtain these;
(2)	Resources to meet the comple-
tion schedule contained in the suba-
greement;
(3)	A satisfactory performance
record for completion of subagree-
ments;
(4)	Accounting and auditing proce-
dures adequate to control property,
funds and assets, as required in this
part and 40 CPR Part 30: and
(5)	Demonstrated compliance or will-
ingness to comply with the civil rights,
equal employment opportunity, labor
law and other statutory requirements
tinder 40 CFR Part 30.
(b)	The recipient shall not make
awards to contractors who have been
suspended, debarred, or voluntarily ex-
cluded under 40 CFR Part 32 nor shall
it permit any portion of the work re-
quired by the subagreement to be per-
formed at any facility listed on the
EPA List of Violating Facilities (see 40
CFR Part 15).
6 33.225 Violations.
The recipient shall refer violations
of law to the local. State or FederaJ
321
-------
§ 33.230
40 CFR Ch. I (7-1-86 Edition)
authority with jurisdiction over the
matter (see 40 CFR 30.610).
[48 FR 12926. Mar. 28. 1983; 48 FR 30364.
July 1. 1983]
8 33.230 Competition.
(a)	The recipient shall conduct all
procurement transactions in a manner
that provides maximum open and free
competition.
(b)	Procurement practices shall not
unduly restrict or eliminate competi-
tion. Examples of practices considered
to be unduly restrictive include:
(1)	Noncompetitive practices be-
tween firms;
(2)	Organizational conflicts of inter-
est;
(3)	Unnecessary experience and
bonding requirements;
(4)	State or local laws, ordinances,
regulations or procedures which give
local or in-State bidders or proposers
preference over other bidders or pro-
posers in evaluating bids or proposals;
or
(5)	Placing unreasonable require*
ments on firms in order for them to
qualify to do business.
(c)	The recipient may use a prequali-
fication list(s) of persons, firms or
products if it:
(1)	Updates its prequalified list(s) at
least every six months;
(2)	Reviews and acts on each request
for prequalification made more than
30 days before the closing date for re-
ceipt of proposals or bid opening; and
(3)	Gives adequate public notice of
its prequalification procedure in ac-
cordance with the public notice proce-
dures in § 33.410 or § 33.510.
(d)	A recipient may not use a pre-
qualified list(s) of persons or firms if
the procedure unnecessarily restricts
competition. However, this restriction
does not apply to § 33.525 "Optional
selection procedure for negotiation
and award of subagreements for archi-
tectural and engineering services."
Editorial Note: For a class deviation doc-
ument affecting § 33.230(b) (1) and (2). see
SO FR 24876, June 13. 1985.
§ 33.235 Profit.
(a) Recipients must assure that only
fair and reasonable profits are paid to
contractors awarded subagreements
under EPA assistance agreements.
(b)	The recipient shall negotiate
profit as a separate element of price
for each subagreement in which there
is no price competition, or where price
is based on cost analysis.
(c)	Where the recipient receives two
or more bids, profit included in a for-
mally advertised, competitively bid,
fixed price subagreement shall be con-
sidered reasonable.
(d)	Off-the-shelf or catalog supplies
are exempt from this section.
6 33.240 Small, minority, women's, and
labor surplus area businesses.
(a)	It is EPA policy to award a fair
share of subagreements to small, mi-
nority. and women's businesses. The
recipient must take affirmative steps
to assure that small, minority, and
women's businesses are used when pos-
sible as sources of supplies, construc-
tion and services. Affirmative steps
shall include the following:
(1)	Including qualified small, minori-
ty. and women's businesses on solicita-
tion lists;
(2)	Assuring that small, minority,
and women's businesses are solicited
whenever they are potential sources;
(3)	Dividing total requirements,
when economically feasible, into small
tasks or quantities to permit maxi-
mum participation of small, minority,
and women's businesses;
(4)	Establishing delivery schedules,
where the requirements of the work
permit, which will encourage partici-
pation by small, minority, and
women's businesses;
(5)	Using the services and assistance
of the Small Business Administration
and the Office of Minority Business
Enterprise of the U-S. Department of
Commerce, as appropriate; and
(6)	If the contractor awards suba-
greements. requiring the contractor to
take the affirmative steps in para-
graphs (a) (1) through (5) of this sec-
tion.
(b)	[Reserved]
(c)	EPA encourages recipients to
procure supplies and services from
labor surplus area firms.
§ 33^45 Privity of subagreement.
Neither EPA nor the United States
shall be a party to any subagreement
322
-------
Environmental Protection Agency
nor to any solicitation or request for
proposals.
§ 33.250 Documentation.
(a)	Procurement records and files for
procurements in excess of $10,000
shall include the following;
(1)	Basis for contractor selection;
(2)	Written justification for selection
of the procurement method;
(3)	Written justification for use of
any specification which does not pro-
vide for maximum free and open com-
petition;
(4)	Written justification for the type
of subagreement;
(5)	Basis for award cost or price, in-
cluding a copy of the cost or price
analysis made in accordance with
§ 33.290 and documentation of negotia-
tions; and
(6)	Written justification for reject-
ing bids.
(b)	Recipients must state the rea-
sons for rejecting any or all bids and
the justification for procurements on
a noncompetitively negotiated basis
and make them available for public in-
spection.
Editorial Note: For a class deviation doc-
ument affecting § 33.250, see 50 FR 24876,
June 13, 1985.
6 33.255 Specifications.
(a)	Recipients must incorporate in
their specifications a clear and accu-
rate description of the technical re-
quirements for the material, product
or service to be procured. Such de-
scription shall not, in competitive pro-
curements, contain features which
unduly restrict competition, unless the
features are necessary to test or dem-
onstrate a specific thing or to provide
for necessary interchangeability of
parts and equipment or to promote in-
novative technologies. The description
shall include a statement of the quali-
tative nature of the material, product
or service to be procured and, when
necessary, shall set forth those mini-
mum essential characteristics and
standards to which it must conform if
it is to satisfy its intended use.
(b)	The recipient shall avoid the use
of detailed product specifications if at
all possible.
-------
§33.270
(i) A "bid guarantee" from each
bidder equivalent to five percent of
the bid price. The "bid guarantee"
shall consist of a firm commitment
such as a bid bond, certified check or
other negotiable instrument accompa-
nying a bid as assurance that the
bidder will, upon acceptance of the
bid, execute such contractual docu-
ments as the EPA recipient may re-
quire within the time specified.
 A "performance bond" for 100
percent of the subagreement price. A
"performance bond" is one that the
contractor executes in connection with
a subagreement to secure fulfillment
of all its obligations under such suba-
greement.
(iii) A "payment bond" for 100 per-
cent of the subagreement price. A
"payment bond" is one that the con-
tractor executes in connection with a
subagreement to assure payment as re-
quired by law, to all persons supplying
labor and material in the execution of
the work provided for in the subagree-
ment.
(3) Where bonds are required in the
situations described above, bidders and
contractors shall obtain them from
companies holding certificaties of au-
thority as acceptable sureties (31 CFR
Part 223).
(b) Recipients and contractors must
follow the flood hazard area require-
ments of the Flood Disaster Pro tec -
tion Act of 1973 contained in 40 CFR
Part 30.
§ 33.270 Code of conduct.
(a)	Recipients shall maintain a writ-
ten code or standards of conduct
which shall govern the performance of
its officers, employees, or agents en-
gaged in the award and administration
of subagreements supported by EPA
funds. No employee, officer or agent
of the recipient shall participate in
the selection, award or administration
of a subagreement supported by EPA
funds if a conflict of interest, real or
apparent, would be involved.
(b)	Such a conflict would arise when:
(1) Any employee, officer or agent of
the recipient, any member of their im-
mediate families, or their partners
have a financial or other interest in
the firm selected for award, or
40 CFR Ch. I (7-1-86 Edition)
(2) An organization which may re-
ceive or has been awarded a subagree-
ment employs, or is about to employ,
any person under paragraph (b)(1) of
this section.
(c)	The recipient's officers, employ-
ees or agents shall neither solicit nor
accept gratuities, favors or anything of
monetary value from contractors, po-
tential contractors or other parties to
subagreements.
(d)	Recipients may set minimum
rules where the financial interest is
not substantial or the gift is an unso-
licited item of nominal intrinsic value.
(e)	To the extent permitted by State
or local law or regulations, the recipi-
ent's code of conduct shall provide for
penalties, sanctions or other discipli-
nary actions for violations of the code
by the recipient's officers, employees
or agents or by contractors or their
agents.
6 33.275 Federal cost principles.
The following cost principles apply
to assistance agreements and suba-
greements:
(a)	State and local governments
must comply with OMB Circular A-87
to determine allowable costs.
(b)	Educational institutions must
comply with OMB Circular A-21 to de-
termine allowable costs and with OMB
Circular A-88 for indirect cost rates.
(c)	Nonprofit institutions must
comply with OMB Circular A-122 to
determine allowable costs.
(d)	All other recipients, contractors
and subcontractors must comply with
the cost principles contained in the
Federal Procurement Regulations (41
CFR 1-15.2 and. if appropriate. S 1-
15.4) to determine allowable costs.
6 33.280 Payment to consultants.
(a) For all EPA assistance agree-
ments, EPA will limit its participation
in the salary rate (excluding overhead)
paid to individual consultants retained
by recipients or by a recipient's con-
tractors or subcontractors to the maxi-
mum daily rate for a GS-18. (Recipi-
ents may, however, pay consultants
more than this amount.) This limita-
tion applies to consultation services of
designated individuals with specialized
skills who are paid at a daily or hourly
324
-------
Environmental Protection Agency
rate. This rate does not include trans-
portation and subsistence costs for
travel performed: recipients will pay
these in accordance with their normal
travel reimbursement practices.
(b) Subagreements with firms for
services which are awarded using the
procurement requirements in this part
are not affected by this limitation.
[48 FR 12926. Mar. 28. 1983; 48 FR 30364,
July 1. 1983]
S 33.285 Prohibited types of subagree-
ments.
The cost-plus-percentage-of-cost
(e.g., a multiplier which includes
profit) and the percentage-of-construc-
tion-cost types of subagreements shall
not be used.
§ 33.290 Cost and price considerations.
(a)	The recipient shall conduct a
cost analysis of all negotiated change
orders and all negotiated subagree-
ments estimated to exceed $10,000.
(b)	The recipient shall conduct a
price analysis of all formally adver-
tised procurements estimated to
exceed $10,000 if there are fewer than
three bidders.
(c)	For negotiated procurement, con-
tractors and subcontractors shall
submit cost or pricing data in support
of their proposals to the recipient.
ti 33.295 Subagreements awarded by a con-
tractor.
A contractor must comply with the
following provisions in its award of su-
bagreements. (This section does not
apply to a supplier's procurement of
materials to produce equipment, mate-
rials and catalog, off-the-shelf, or
manufactured items.)
(a)	40 CFR Part 32 (Debarment and
Suspension Under EPA Assistance
Programs);
(b)	The limitations on subagreement
award in § 33.220(a) (1) through (5);
(c)	The profit requirements in
§ 33.235;
(d)	The requirements for small, mi-
nority, women's and labor surplus area
businesses in § 33.240;
(e)	The specification requirements of
§ 33.255;
(f)	The requirements of Subpart C
of this part, if appropriate;
§33.405
(g)	The Federal cost principles in
5	33.275;
(h)	The prohibited types of subi
greements in § 33.285;
(i)	The cost and price considerations
in S 33.290. and
(j) The applicable subagreement pro-
visions in Subpart F of this part.
Small Purchases
6	33.305 Small purchase procurement
If the aggregate amount involved in
any one procurement transaction does
not exceed $10,000, including estimat-
ed handling and freight charges, over-
head and profit, the recipient may use
small purchase procedures.
Editorial Note; For a class deviation doc-
ument affecting 5 33.305, see 50 FR 24876.
June 13. 1985.
§ 33.310 Small purchase procedures.
Small purchase procedures are rela-
tively simple procurement methods
that are sound and appropriate for a
procurement of services, supplies or
other property costing in the aggre-
gate not more than $10,000.
Editorial Note: For a class deviation dc
ument affecting § 33.310. see 50 FR 2487c
June 13, 1985.
6 33.315 Requirements for competition.
(a)	Recipients shall not divide a pro-
curement into smaller parts to avoid
the dollar limitation for competitive
procurement.
(b)	Recipients shall obtain price or
rate quotations from an adequate
number of qualified sources.
Formal Advertising
6 33.405 Formal advertising procurement
method.
(a)	The requirements in § § 33.405
through 33.430 apply to all formally
advertised subagreements in excess of
$10,000. Formal advertising means the
public solicitation of sealed bids and
the award of a subagreement based on
a fixed price (lump sum, unit price, or
a combination of the two) to the
lowest, responsive, responsible bidder.
(b)	Formal advertising requires at a
minimum:
325
-------
§ 33.410
40 CFR Ch. I (7-1-86 Edition)
(1)A	complete, adequate and realis-
tic specification or purchase descrip-
tion of what is required;
(2)	Two or more responsible bidders
which are willing and able to compete
effectively for the recipient's business;
(3)	A procurement that lends itself
to the award of a fixed-price subagree-
ment; and
(4)	That the selection of the success-
ful bidder be made principally on the
basis of price.
§ 33.410 Public notice and solicitation of
bids.
The recipient shall give adequate
public notice of the solicitation, invit-
ing bids and stating when and how the
bidding documents may be obtained or
examined.
§ 33.415 Time for preparing bids.
The recipient must allow adequate
time between the date the public
notice is first published and the date
by which bids must be submitted.
i 33.420 Adequate bidding documents.
Recipient's bidding documents shall
Include:
(a)	A complete statement of work to
be performed including, where appro-
priate, design drawings and specifica-
tions and the required performance
schedule;
(b)	The terms and conditions of the
subagreement to be awarded, includ-
ing payment, delivery schedules, point
of delivery and acceptance criteria;
(c)	A clear explanation of the recipi-
ent's method of bidding and the
method of evaluating bid prices, and
its basis and method for awarding the
subagreement;
(d)	Any other responsibility require-
ments or evaluation criteria which the
recipient will use in evaluating bid-
ders;
(e)	The prevailing wage determina-
tion. made under the Davis-Bacon Act.
if applicable; and
(f)	The deadline and place to submit
bids and a copy of § 33.295, Subparts F
and G and, if appropriate. EPA Form
5720-4 "Labor Standard Provisions for
Federally Assisted Construction Con-
tracts."
[48 PR 12926, Mar. 28. 1983: 48 FR 30364,
July 1. 1983]
5	33.425 Public opening of bids.
The recipient shall publicly open
bids at the place, date and time an-
nounced in the bidding documents.
§ 33.430 Award to the lowest, responsive,
responsible bidder.
(a)	The recipient shall evaluate all
bids in accordance with the methods
and criteria in the bidding documents.
(b)	The recipient shall award a
fixed-price subagreement to the
lowest, responsive, responsible bidder.
Where specified in the bidding docu-
ments, recipients shall consider factors
such as discounts, transportation costs
and life cycle costs to determine the
low bid. Payments discounts may be
used to determine the low bid only
when prior experience of the recipient
indicates that it generally accepts such
discounts.
(c)	The recipient may reject all bids
only when it has sound, documented
business reasons which are in the best
interest of the program for which EPA
assistance is awarded (see 5 33.250
"Documentation").
Competitive Negotiation
6	33.505 Competitive negotiation procure-
ment method.
(a)	The requirements in S§ 33.505
through 33.525 apply to all competi-
tively negotiated subagreements in
excess of $10,000.
(b)	Recipients may use competitive
negotiation only if conditions are not
appropriate for the use of the formal
advertising method of procurement
(see § 33.405).
5 33J510 Public notice.
(a)	The recipient must give adequate
public notice for competitively negoti-
ated procurements.
(b)	The notice of a request for pro-
posals must state how to obtain associ-
ated documents, including a copy of
§ 33.295, Subparts F and G. the basis
for subagreement award, and. if appro-
priate, EPA Form 5720-4 "Labor
Standard Provisions for Federally As-
sisted Construction Contracts."
(c)	Requests for proposals must be
written, contain enough information
to enable a prospective offeror to pre-
326
-------
Environmental Protection Agency
pare a proposal, contain all evaluation
criteria and the relative importance
attached to each, and clearly state the
deadline and place to submit propos-
als.
[48 FR 12926. Mar. 28. 1983; 48 FR 30364,
July 1. 1983]
§ 33.515 Evaluation of proposals.
(a)	Recipients must uniformly and
objectively evaluate all proposals sub-
mitted in response to the request for
proposals.
(b)	Recipients must base their deter-
minations of qualified offerors and ac-
ceptable proposals solely on the eval-
uation criteria stated in the request
for proposals.
§ 33.520 Negotiation and award of sub-
agreement.
(a)	Unless the request for proposals
states that award may be based on ini-
tial offers alone, the recipient must
conduct meaningful negotiations with
the best qualified offerors with accept-
able proposals within the competitive
range, and permit revisions to obtain
best and final offers. The best quali-
fied offerors must have equal opportu-
nities to negotiate or revise their pro-
posals. During negotiations, the recipi-
ent must not disclose the indentity of
competing offerors or any information
from competing proposals.
(b)	The recipient must award the
subagreement to the responsible of-
feror whose proposal is determined in
writing to be the most advantageous
to the recipient, taking into consider-
ation price and other evaluation crite-
ria set forth in the request for propos-
als.
(c)	The recipient must promptly
notify unsuccessful offerors that their
proposals were rejected.
Cd) The recipient must document its
procurement file to indicate how pro-
posals were evaluated, what factors
were used to determine the best quali-
fied offerors within the competitive
range, and what factors were used to
determine the subagreement award.
[48 FR 12926. Mar. 28, 1983: 48 FR 30364,
July 1. 19831
§33.605
§ 33.525 Optional selection procedure for
negotiation and award of subagree
ments for architectural and engineer'
ing services.
(a)	The recipient may evaluate and
select an architect or engineer using
the procedures in this section in place
of the procedures in § 33.520, "Negoti-
ation and award of subagreement."
(b)	The recipient may use either a
prequalified list developed in accord-
ance with § 33.230(c) or responses to
requests for statement of qualifica-
tions to determine the most technical-
ly qualified architects or engineers.
(c)	After selecting and ranking the
most qualified architects or engineers,
the recipient will request technical
proposals from those architects or en-
gineers and inform them of the eval-
uation criteria the recipient will use to
rank the proposals.
(d)	The recipient shall then select
and determine, in writing, the best
technical proposal.
(e)	After selecting the best proposal,
the recipient shall attempt to negoti-
ate fair and reasonable compensation
with that offeror.
(f)	If the recipient and the offeror c
the best proposal cannot agree on th
amount of compensation, the recipient
shall formally terminate negotiations
with that offeror. The recipient shall
then negotiate with the offeror with
the next best proposal. This process
will continue until the recipient
reaches agreement on compensation
with an offeror with an acceptable
proposal. Once the recipient termi-
nates negotiations with an offeror, the
recipient cannot go back and renegoti-
ate with that offeror.
[48 FR 12926, Mar. 28. 1983: 48 FR 30364.
July 1.1983]
Noncompetitive Negotiation
6 33.605 Noncompetitive negotiation pro-
curement method.
Recipients may use noncompetitive
negotiation to award a subagreement
if the other three procurement meth-
ods are inappropriate because:
(a)	The item is available only from a
single source;
(b)	A public exigency or emergency
exists and the urgency for the requir
327
-------
§33.705
40 CFR Ch. I (7-1-86 Edition)
ment will not permit a delay incident
to competitive procurement;
(c)	After solicitation from a number
of sources, competition is inadequate;
or
(d)	The EPA award official author-
izes noncompetitive negotiation, sub-
ject to the limitation in 5 33.715(a)(2).
Subpart C—Requirements for Recipi-
ents of Assistance Agreements for
the Construction of Treatment
Works
§ 33.705 Applicability and scope of this
subpart.
Recipients of assistance agreements
awarded under 40 CFR Part 35. Sub-
parts E and I must comply with the
following requirements.
6 33.710 Buy American.
Section 215 of the Clean Water Act
requires that contractors give prefer-
ence for the use of domestic material
in the construction of EPA funded
treatment works.
(a)	Contractors must use domestic
construction material in preference to
nondomestic material if it is priced no
more than 6 percent higher than the
bid or offered price of the nondomes-
tic material, including all costs of de-
livery to the construction site and any
applicable duty, whether or not as-
sessed. The recipient will normally
base the computations on prices and
costs in effect on the date of opening
of bids or proposals.
(b)	The award official may waive the
Buy American provision based upon
factors he considers relevant, includ-
ing:
(1)	Such use is not in the public in-
terest;
(2)	The cost is unreasonable;
(3)	The Agency's available resources
are not sufficient to implement the
provision, subject to the Deputy Ad-
ministrator's concurrence;
(4)	The articles, materials or sup-
plies of the class or kind to be used or
the articles, materials or supplies from
which they are manufactured are not
mined, produced or manufactured in
the United States in sufficient and
reasonably available commercial quan-
tities or satisfactory quality for the
particular project; or
(5) Application of this provision is
contrary to multilateral government
procurement agreements, subject to
the Deputy Administrator's concur-
rence.
(c) All bidding documents, subagree-
ments. and, if appropriate, requests
for proposals must contain the "Buy
American" provision in § 33.1030.
6 33.715 Use of the same architect or engi-
neer during construction.
(a) If the recipient is satisified with
the qualifications and performance of
the architect or engineer who provided
any or all of the facilities planning or
design services for the project and
wishes to retain that firm or individ-
ual during construction of the project,
it may do so without further public
notice and evalution of qualifications,
provided:
(1)	The recipient received a facilities
planning (Step 1) or design grant
(Step 2), and selected the architect or
engineer in accordance with EPA's
procurement regulations in effect
when EPA awarded the grant; or
(2)	The award official approves non-
competitive procurement under
§ 33.605(d) for reasons other than
simply using the same individual or
firm that provided facilities planning
or design services for the project; or
(3)	The recipient attests that:
(i) The initial request for proposals
clearly stated the possibility that the
firm or individual selected could be
awarded a subagreement for services
during construction; and
-------
Environmental Protection Agency
(iii)	No employee, officer or agent of
the recipient, any member of their im-
mediate families, or their partners
have financial or other interest in the
firm selected for award; and
(iv)	None of the recipient's officers,
employees or agents solicited or ac-
cepted gratuities, favors or anything
of monetary value from contractors or
other parties to subagreements.
(b) However, if the recipient uses the
procedures in paragraph (a) to retain
an architect or engineer, any Step 3
subagreements between the architect
or engineer and the recipient must
meet all of the other procurement pro-
visions in this part.
Subpart D—Requirement* for Institu-
tions of Higher Education and
Other Nonprofit Organizations
§ 33.805 Applicability and scope of this
subpart.
Recipients who are subject to the
provisions of OMB Circular A-110,
"Grants and Agreements with Institu-
tions of Higher Education. Hospitals,
and Other Nonprofit Organizations"
are not subject to all of the require-
ments in this part.
§ 33.810 Nonapplicable subagreement
clauses.
The following clauses in Subpart F
of this part do not apply to institu-
tions of higher education and other
nonprofit organizations:
(a)	Energy efficiency (§ 33.1021);
(b)	Changes (§ 33.1030,3);
(c)	Differing site conditions
(§ 33.1030,4); and
(d)	Price reduction for defective cost
or pricing data (§ 33.1030.8).
[48 FR 12926. Mar. 28. 1983; 48 FR 3036S.
July 1. 19831
§ 33.815 Nonapplicable procurement pro-
visions.
The following procurement provi-
sions do not apply to institutions of
higher education and other nonprofit
organizations:
(a)	Subparts C and E;
(b)	Sections 33.405 through 33.430
"Formal advertising;"
(c)	Sections 33.505 through 33.525
"Competitive negotiation;"
§ 33.905
(d)	Section 33.605 "Noncompetitive
negotiation" (see § 33.820(b));
(e)	The requirement in $ 33.270(a
"Code of conduct" to have a written
code of conduct;
(f)	The provisions of § 33.240 "Small,
minority, women's, and labor surplus
area businesses" which:
(1)	Encourage the award of a fair
share of contracts to women's and
labor surplus area businesses;
(2)	Require the specific affirmative
action steps in § 33.240(a)(1) through
(a)(6); however, nonprofit organiza-
tions are required to make positive ef-
forts to use small businesses and mi-
nority owned businesses as sources of
supplies and services;
(g)	Subpart G "Protests."
S 33.820 Additional procurement require-
ments.
(a)	Recipients must exclude contrac-
tors that develop or draft specifica-
tions. requirements, statements of
work., invitation for bids, or requests
for proposals from competing for
awards resulting from the prior effort.
(b)	For all proposed sole source sub-
agreements and where only one bid o
proposal is received, the recipien
must request the award official's prior
approval to award the subagreement if
the aggregate expenditure is expected
to exceed $10,000.
Subpart E—Requirements for Recipi-
ents of Remedial Action Coopera-
tive Agreements Under the Com-
prehensive Environmental Re-
sponse, Compensation, and Liabil-
ity Act of 1980
§ 33.905 Applicability and scope of this
subpart.
(a)	The requirements in §§ 33.910
through 33.915 apply only -to remedial
action construction awards which EPA
funds as part of a cooperative agree-
ment under the Comprehensive Envi-
ronmental Response, Compensation,
and Liability Act of 1980 (Superfund).
(b)	Studies, investigations, or engi-
neering activities, such as design and
remedial construction oversight, are
not subject to the requirements in
§§33.910 through 33.915, but are su
329
-------
§33.910
40 CFR Ch. I (7-1-86 Edition)
ject to the requirements in Subparts
A, B, F and G of this part.
[48 FR 12926, Max. 28. 1983; 48 FR 30365.
July 1. 1983]
§ 33.910 Preference for formal advertising.
If a recipient wants to use a procure-
ment method other than formal adver-
tising, it must receive the EPA award
official's concurrence with the deter-
mination.
§ 33.915 Award official approval.
The award official shall approve the
recipient's use of a procurement
method other than formal advertising
only after the recipient has completed
planning remedial activities and select-
ed a cost-effective alternative.
Subpart F—Subagreement Previsions
§33.1005 Applicability and scope of this
subpart
(a)	This subpart applies to all EPA
recipients and describes the minimum
content of each subagreement (con-
tract and subcontract).
(b)	Nothing in this subpart prohibits
a recipient from requiring more assur-
ances. guarantees, or indemnity or
other contracture! requirements from
any party to a subagreement.
6 33.1010 Requirements for subagreement
clauses.
Recipients shall include clauses that
meet the requirements of §§33.1015
through 33.1021, and the appropriate
clauses in § 33.1030, in each procure-
ment subagreement.
§ 33.1015 Subagreement provisions clause.
Each subagreement must include
provisions defining a sound and com-
plete agreement, including the:
Ca) Nature, scope, and extent of
work to be performed;
(b)	Timeframe for performance;
(c)	Total cost of the subagreement;
and
(d)	Payment provisions.
§ 33.1016 Labor standards provisions.
(This clause applies only when re-
quired by statute.) Recipients shall in-
clude a copy of EPA Form 5720-4
"Labor Standards Provisions for Fed-
erally Assisted Construction Con-
tracts" in each subagreement for con-
struction (as defined by the Secretary
of Labor). The form contains the
Davis-Bacon Act requirements (40
U.S.C. 276a—276a-7); the Copeland
Regulations (29 CFR Part 3); the Con-
tract Work Hours and Safety Stand-
ards Act—Overtime Compensation
(940 U.S.C. 327-333) and the nondis-
crimination provisions in Executive
Order 11246, as amended.
[48 FR 12926, Max. 28, 1983; 48 FR 30365,
July 1. 1983]
§33.1019 Patents data and copyrights
clause.
Except for construction grant sub-
agreements, all subagreements shall
include notice of EPA requirements
and regulations pertaining to report-
ing and patent rights under any suba-
greement involving research, develop-
mental. experimental or demonstra-
tion work with respect to any discov-
ery or invention which arises or is de-
veloped in the conduct of work under
a subagreement. This notice shall also
include EPA requirements and regula-
tions pertaining to copyrights and
rights in data contained in 40 CFR
Part 30.
§ 33.1020 Violating facilities clause.
Subagreements in excess of $100,000
shall contain a provision which re-
quires contractor compliance with all
applicable standards, orders or re-
quirements issued under section 306 of
the Clean Air Act (42 U.S.C. 1857(h)).
section 508 of the Clean Water Act (33
U.S.C. 1368), Executive Order 11738,
and EPA regulations (40 CFR Part 15)
which prohibit the use under nonex-
empt Federal contracts, grants or
loans of facilities included on the EPA
List of Violating Facilities.
§33.1021 Energy efficiency clause.
Subagreements shall comply with
mandatory standards and policies on
energy efficiency contained in the
State's energy conservation plan
issued in compliance with the Energy
Policy and Conservation Act (Pub. L.
94-163).
330
-------
Environmental Protection Agency
§ 33.1030 Model subagreement clauses.
Recipients must include, when ap-
propriate, the following clauses or
their equivalent in each subagree-
ment. Recipients may substitute other
terms for "recipient and" "contractor"
in their subagreements.
1. Supersession
The recipient and the contractor agree
that this and other appropriate clauses in
40 CFR 33.1030 apply to that work eligible
lor EPA assistance to be performed under
this subagreement and that these clauses
supersede any conflicting provisions of this
subagreement.
2. Privity or Subagreement
This subagreement is expected to be
funded in part with funds from the U.S. En-
vironmental Protection Agency. Neither the
United States nor any of its departments,
agencies or employees is. or will be. a party
to this subagreement or any lower tier sub-
agreement. This subagreement is subject to
regulations contained in 40 CFR Part 33 in
effect on the date of the assistance award
for this project.
3. Changes
(a) The following clause applies only to
subagreements for construction. (1) The re-
cipient may at any time, without notice to
any surety, by written order designated or
indicated to be a change order, make any
change in the work within the general scope
of the subagreement, including but not lim-
ited to changes:
(1)	In the specifications (including draw-
ings and designs):
(ii)	In the time, method or manner of per-
formance of the work:
(iii)	In the recipient-furnished facilities,
equipment, materials, services or site, or
(iv)	Directing acceleration in the perform-
ance of the work.
(2)	A change order shall also be any other
written order (including direction, instruc-
tion. interpretation or determination) from
the recipient which causes any change, pro-
vided the contractor gives the recipient writ-
ten notice stating the date, circumstances
and source of the order and that the con-
tractor regards the order as a change order.
(3)	Except as provided in this clause, no
order, statement or conduct of the recipient
shall be treated as a change under this
clause or entitle the contractor to an equita-
ble adjustment.
(4)	If any change under this clause causes
an increase or decrease in the contractor's
cost or the time required to perform any
part of the work under this contract, wheth-
er or not changed by any order, the recipi-
ent shall make an equitable adjustment and
§33.1030
modify the subagreement in writing. Except
for claims based on defective specifications,
no claim for any change under paragraph
(a)(2) above shall be allowed for any costs
Incurred more than 20 days before the con-
tractor gives written notice as required in
paragraph (a)(2). In the case of defective
specifications for which the recipient is re-
sponsible, the equitable adjustment shall in-
clude any increased cost the contractor rea-
sonably Incurred in attempting to comply
with those defective specifications.
(5)	If the contractor intends to assert a
claim for an equitable adjustment under
this clause, he must, within 30 days after re-
ceipt of a written change order under para-
graph (a) (1) or the furnishing of a written
notice under paragraph (a) (2). submit a
written statement to the recipient setting
forth the general nature and monetary
extent of such claim. The recipient may
extend the 30-day period. The contractor
may include the statement of claim in the
notice under paragraph (2) of this change
clause.
(6)	No claim by the contractor for an equi-
table adjustment shall be allowed if made
after final payment under this subagree-
ment.
(t» The following clause applies only to
subagreements for services. (1) The recipient
may at any time, by written order, make
changes within the general scope of this
subagreement in the services or work to be
performed. If such changes cause an in-
crease or decrease in the contractor's cost or
time required to perform any services under
this subagreement. whether or not changed
by any order, the recipient shall make an
equitable adjustment and modify this suba-
greement in writing. The contractor must
assert any claim for adjustment under this
clause in writing within 30 days from the
date it receives the recipient's notification
of change, unless the recipient grants addi-
tional time before the date of final pay-
ment.
(2) No services for which the contractor
will charge an additional compensation
shall be furnished without the written au-
thorization of the recipient.
(c) The following clause applies only to
subagreements for supplies. (1) The recipi-
ent may at any time, by written order and
without notice to the sureties, change the
general scope of this subagreement in any
one or more of the following:
(1)	Drawings, designs or specifications
where the supplies to be furnished are spe-
cifically manufactured for the recipient:
(ii)	Method of shipment or packing; and
(iii)	Place of delivery.
(2)	If any change causes an increase or de-
crease in the cost or the time required to
perform any part of the work under this
subagreement, whether or not changed b'
331
-------
§ 33.1030
40 CFR Ch. I (7-1-86 Edition)
any such order, the recipient shall make an
equitable adjustment In the subagreement
agreement price or delivery schedule, or
both, and modify the subagreement in writ-
ing. The contractor must assert any claim
for adjustment under this clause within 30
days Irom the date the contractor receives
the recipient's notification of change. If the
recipient decides that the facts justify such
action, the recipient may receive and act
upon any such claim asserted at any time
before final payment under this subagree-
ment. Where the cost of property made ob-
solete or excess as a result of a change is in-
cluded in the contractor's claim for adjust-
ment. the recipient has the right to pre-
scribe the manner of disposition of such
property. Nothing in this clause shall
excuse the contractor from proceeding with
the subagreement as changed.
4. Differing Site Conditions
The following clause applies only to con-
struction subagreements. (a) The contractor
shall promptly, and before such conditions
are disturbed, notify the recipient in writing
of:
(1)	Subsurface or latent physical condi-
tions at the site differing materially from
those indicated in this subagreement. or
(2)	Unknown physical conditions at the
site, of an unusual nature, diflerins materi-
ally from those ordinarily encountered and
generally recognized as inhering in work of
the character provided for in this subagree-
ment.
(b)	The recipient shall promptly investi-
gate the conditions. If it finds that condi-
tions materially differ and will cause an in-
crease or decrease in the contractor's cost or
the time required to perform any part of
the work under this subagreement. whether
or not changed as a result of such condi-
tions, the recipient shall make an equitable
adjustment and modify the subagreement in
writing.
(c)	No claim of the contractor under this
clause shall be allowed unless the contractor
has given the notice required in paragraph
(a) of this clause. However, the recipient
may extend the time prescribed in para-
graph (a).
(d)	No claim by the contractor for an equi-
table adjustment shall be allowed If asserted
after final payment under this subagree-
ment.
5. Suspension or Work
The following clause applies only to con-
struction subagreements. (a) The recipient
may order the contractor in writing to sus-
pend. delay or interrupt all or any part of
the work for such period of time as the re-
cipient may determine to be appropriate for
the convenience of the recipient.
(b)	If the performance of all or any part
of the work is suspended, delayed or inter-
rupted for an unreasonable period of time
by an act of the recipient in administration
of this subagreement. or by the recipient's
failure to act within the time specified in
this subagreement (or if no time is specified,
within a reasonable time), the recipient
shall make an adjustment for any increase
in the cost ol performance of this subagree-
ment (excluding profit) necessarily caused
by such unreasonable suspension, delay or
interruption and modify the subagreement
in writing. However, no adjustment shall be
made under this-clause for any suspension,
delay or interruption to the extent (1) that
performance would have been so suspended,
delayed or interrupted by any other cause,
including the fault or negligence of the con-
tractor, or (2) for which an equitable adjust-
ment is provided for or excluded under any
other provision of this subagreement.
(c)	No claim under this clause shall be al-
lowed (1) for any costs incurred more than
20 days before the contractor notified the
recipient in writing of the act. or failure to
act, involved (this requirement does not
apply to a claim resulting from a suspension
order), and (2) unless the amount claimed is
asserted in writing as soon as practicable
after the termination of such suspension,
delay or interruption, but not later than the
date of final payment under the subagree-
ment.
6. Termination
(a)	This subagreement may be terminated
in whole or in part in writing by either
party In the event of substantial failure by
the other party to fulfill its obligations
under this subagreement through no fault
of the terminating party, provided that no
termination may be effected unless the
other party is given (1) not less than ten
(10) calendar days' written notice (delivered
by certified mall, return receipt requested)
of intent to terminate, and (2) an opportuni-
ty for consultation with the terminating
party prior to termination.
(b)	This subagreement may be terminated
in whole or in part in writing by the recipi-
ent for its convenience, provided that the
contractor is given (1) not less than ten (10)
calendar days' written notice (delivered by
certified mall, return receipt requested) of
Intent to terminate, and (2) an opportunity
for consultation with the terminating party
prior to termination.
(c)	If termination for default is effected
by the recipient, an equitable adjustment in
the price provided for in this subagreement
nhn.li be made, but (1) no amount shall be al-
lowed for anticipated profit on unperformed
services or other work, and (2) any payment
due to the contractor at the time of termi-
nation may be adjusted to cover any addi-
332
-------
Environmental Protection Agency
§33.1030
tional costs to the recipient because of the
contractor's default. If termination for de-
fault is effected by the contractor, or if ter-
mination for convenience is effected by the
recipient, the equitable adjustment shall in-
clude a reasonable profit for services or
other work performed. The equitable ad-
justment for any termination shall provide
for payment to the contractor for services
rendered and expenses incurred prior to the
termination, in addition to termination set-
tlement costs reasonably incurred by the
contractor relating to commitments which
had become firm prior to the termination.
(d)	Upon receipt of a termination action
under paragraphs (a) or (b) above, the con-
tractor shall (1) promptly discontinue all af-
fected work (unless the notice directs other-
wise). and (2) deliver or otherwise make
available to the recipient all data, drawings,
specifications, reports, estimates, summaries
and such other information and materials
as may have been accumulated by the con-
tractor in performing this subagreement.
whether completed or in process.
(e)	Upon termination under paragraphs
(a) or (b) above, the recipient may take over
the work and may award another party a
subagreement to complete the work under
this subagreement.
(f)	II. after termination for failure of the
contractor to fulfill contractual obligations,
it is determined that the contractor had not
failed to fulfill contractual obligations, the
termination shall be deemed to have been
for the convenience of the recipient. In such
event, adjustment of the subagreement
price shall be made as provided In para-
graph (c) of this clause.
T Remedies
Unless otherwise provided in this sub-
agreement, all claims, counter-claims, dis-
putes and other matters in question be-
tween the recipient and the contractor aris-
ing out of. or relating to. this subagreement
or the breach of it will be decided by arbi-
tration if the parties mutually agree, or In a
court of competent jurisdiction within the
State in which the recipient is located.
8. Price Reduction for Detective Cost or
Pricing Data
[Note: The following clause applies to (1)
any subagreement negotiated between the
recipient and its contractor in excess of
$100,000: (2) negotiated subagreement
amendments or change orders in excess of
$100,000 affecting the price of formally ad-
vertised. competitively awarded, fixed price
subagreement. or (3) any lower tier sub-
agreement or purchase order in excess of
$100,000 under a subagreement other than a
formally advertised, competitively awarded,
fixed price subagreement. This clause does
not apply to subagreements awarded on the
basis of effective price competition.]
(a)	The contractor and subcontractor,
where appropriate, assure that the cost and
pricing data submitted for evaluation with
respect to negotiation of prices for negotiat-
ed subagreements, lower tier subagreements
and change orders is based on current, accu-
rate and complete data supported by their
books and records. If the recipient or EPA
determines that any price (including profit)
negotiated in connection with this subagree-
ment, lower tier subagreement or amend-
ment thereunder was increased by any sig-
nificant sums because the data provided was
incomplete, inaccurate or not current at the
time of submission, then such price or cost
or profit shall be reduced accordingly and
the recipient shall modify the subagreement
in writing to reflect such action.
(b)	Failure to agree on a reduction shall
be subject to the remedies clause of this
subagreement.
INote: Since the subagreement is subject
to reduction under this clause by reason of
defective cost or pricing data submitted in
connection with lower tier subagreements.
the contractor may wish to include a clause
in each lower tier subagreement requiring
the lower tier subcontractor to appropriate-
ly indemnify the contractor. It is also ex-
pected that any lower tier subcontractor
subject to such indemnification will general-
ly require substantially similar indemnlfica
tion for defective cost or pricing data sub-
mitted by lower tier contractors.!
9. Audit; Access to Records
(a)	The contractor shall maintain books,
records, documents and other evidence di-
rectly pertinent to performance on EPA
funded work under this subagreement in ac-
cordance with generally accepted account-
ing principles and practices consistently ap-
plied. and 40 CFR Part 30 in effect on the
date of execution of this subagreement. The
contractor shall also maintain the financial
information and data used in the prepara-
tion or support of the cost submission re-
quired under 40 CFR 33.290 for any negoti-
ated subagreement or change order and a
copy of the cost summary submitted to the
recipient. The United States Environmental
Protection Agency, the Comptroller Gener-
al of the United States, the United States
Department of Labor, the recipient, and
(the State) or any of their authorized repre-
sentatives shall have access to all such
books, records, documents and other evi-
dence for the purpose of inspection, audit
and copying during normal business hours.
The contractor will provide proper facilities
for such access and inspection.
(b)	If this is a formally advertised, com-
petitively awarded, fixed price subagree^
ment, the contractor agrees to make parol
333
-------
§33.1030
40 CFR Ch. I (7-1-86 Edition)
graphs (a) through (g) of this clause appli-
cable to all negotiated change orders and
subagreement amendments affecting the
subagreement price. In the case of all other
types of prime subagreements. the contrac-
tor agrees to make paragraphs (a) through
(g) applicable to all subagreements he
awards in excess of $10,000, at any tier, and
to make paragraphs (a) through (g) of this
clause applicable to all change orders direct-
ly related to project performance.
(c)	Audits conducted under this provision
shall be in accordance with generally ac-
cepted auditing standards and with estab-
lished procedures and guidelines of the re-
viewing or audit agency(ies).
(d)	The contractor agrees to disclose all
information and reports resulting from
access to records under paragraphs (a) and
(b) of this clause to any of the agencies re-
ferred to in paragraph (a).
(e)	Records under paragraphs (a) and (b)
above shall be maintained by the contractor
during performance on EPA assisted work
under this subagreement and for the time
periods specified in 40 CFR Part 30. In addi-
tion. those records which relate to any con-
troversy arising under an EPA assistance
agreement, litigation, the settlement of
claims arising out of such performance or to
costs or items to which an audit exception
has been taken shall be maintained by the
contractor for the time periods specified in
40 CFR Part 30.
(f)	Access to records is.not limited to the
required retention periods. The authorized
representatives designated in paragraph (a)
of this clause shall have access to records at
any reasonable time for as long as the
records are maintained.
(g)	This right of access clause applies to fi-
nancial records pertaining to all subagree-
ments (except formally advertised, competi-
tively awarded, fixed price subagreements)
and all subagreement change orders regard-
less of the type of subagreement. and all
subagreement amendments regardless of
the type of subagreement. In addition this
right of access applies to all records pertain-
ing to all subagreements, subagreement
change orders and subagreement amend-
ments:
(1)	To the extent the records pertain di-
rectly to subagreement performance:
(2)	If there is any indication that fraud,
gross abuse or corrupt practices may be in-
volved: or
(3)	If the subagreement is terminated for
default or for convenience.
10. Covenant Against Contingent Fees
The contractor assures that no person or
selling agency has been employed or re-
tained to solicit or secure this subagreement
upon an agreement or understanding for a
commission, percentage, brokerage or con-
tingent fee excepting bona fide employees
or bona fide established commercial or sell-
ing agencies maintained by the contractor
for the purpose of securing business. For
breach or violation of this assurance, the re-
cipient shall have the right to annul this
agreement without liability or. at its discre-
tion. to deduct from the subagreement price
or consideration, or otherwise recover the
full amount of such commission, percent-
age. brokerage or contingent fee.
11. Gratuities
(a)	If the recipient finds after a notice and
hearing that the contractor or any of the
contractor's agents or representatives of-
fered or gave gratuities (in the form of en-
tertainment. gifts or otherwise) to any offi-
cial. employee or agent of the recipient, the
State or EPA in an attempt to secure a sub-
agreement or favorable treatment in award-
ing, amending or making any determina-
tions related to the performance of this su-
bagreement, the recipient may. by written
notice to the contractor, terminate this sub-
agreement. The recipient may also pursue
other rights and remedies that the law or
this subagreement provides. However, the
existence of the facts on which the recipient
bases such findings shall be in issue and
may be reviewed in proceedings under the
Remedies clause of this subagreement.
(b)	In the event this subagreement is ter-
minated as provided in paragraph (a), the
recipient may pursue the same remedies
against the contractor as it could pursue in
the event of a breach of the subagreement
by the contractor, and as a penalty, in addi-
tion to any other damages to which it may
be entitled by law. be entitled to exemplary
damages in an amount (as determined by
the recipient) which shall be not less than
three nor more than ten times the costs the
contractor incurs in providing any such gra-
tuities to any such officer or employee.
12. Buy American
This clause applies only to construction
subagreement awards under 40 CFR Part 35,
Subparts E and I. In accordance with sec-
tion 215 of the Clean Water Act (33 U.S.C.
1251 et seq.) and implementing EPA regula-
tions. the contractor agrees that preference
will be given to domestic construction mate-
rial by the contractor, subcontractors, ma-
terialmen and suppliers in the performance
of this subagreement.
13. Responsibility of the Contractor
(a) The following clause applies only to.
subagreements for services. (1) The contrac-
tor is responsible for the professional qual-
ity, technical accuracy, timely completion
and coordination of all designs, drawings,
specifications, reports and other services
furnished by the contractor under this sub-
334
-------
Environmental Protection Agency
§33.1110
agreement. If the subagreement involves en-
vironmental measurements or data genera-
tion. the contractor shall comply with EPA
quality assurance requirements in 40 CFR
30.503. The contractor shall, without addi-
tional compensation, correct or revise any
errors, omissions or other deficiencies in his
designs, drawings, specifications, reports
and other services.
(2)	The contractor shall perform the pro-
fessional services necessary to accomplish
the work specified in this subagreement in
accordance with this subagreement and ap-
plicable EPA requirements in effect on the
date of execution of the assistance agree-
ment for this project.
(3)	The owner's or EPA's approval of
drawings, designs, specifications, reports
and incidental work or materials furnished
hereunder shall not in any way relieve the
contractor of responsibility for the techni-
cal adequacy of his work. Neither the
owner's nor EPA's review, approval, accept-
ance or payment for any of the services
shall be construed as a waiver of any rights
under this agreement or of any cause for
action arising out of the performance of this
subagreement.
(4)	The contractor shall be. and shall
remain, liable in accordance with applicable
law for all damages to the owner or EPA
caused by the contractor's negligent per-
formance of any of the services furnished
under this subagreement. except for errors,
omissions or other deficiencies to the extent
attributable to the owner, owner-furnished
data or any third party. The contractor
shall not be responsible for any time delays
in the project caused by circumstances
beyond the contractor's control.
(5)	The contractor's obligations under this
clause are in addition to the contractor's
other express or implied assurances under
this subagreement or State law and in no
way diminish any other rights that the
owner may have against the contractor for
faulty materials, equipment or work.
(b) The following clause applies only to
subagreements for construction. (1) The
contractor agrees to perform all work under
this subagreement in accordance with this
agreement's designs, drawings and specifica-
tions.
(2) The contractor guarantees for a period
of at least one (1) year from the date of sub-
stantial completion of the work that the
completed work is free from all defects due
to faulty materials, equipment or workman-
ship and that he shall promptly make what-
ever adjustments or corrections which may
be necessary to cure any defects, including
repairs of any damage to other parts of the
system resulting from such defects. The
owner shall promptly give notice to the con-
tractor of observed defects. In the event
that the contractor fails to make adjust-
ments. repairs, corrections or other work
made necessary by such defects, the owner
may do so and charge the contractor the
cost incurred. The performance bond shall
remain in full force and effect through the
guarantee period.
(3) The contractor's obligations under this
clause are in addition to the contractor's
other express or implied assurances under
this subagreement or State law and in no
way diminish any other rights that the
owner may have against the contractor for
faulty materials, equipment or work.
14. Pinal Payment
Upon satisfactory completion of the work
performed under this subagreement, as a
condition before final payment under this
subagreement or as a termination settle-
ment under this subagreement the contrac-
tor shall execute and deliver to the owner a
release of all claims against the owner aris-
ing under, or by virtue of, this subagree-
ment. except claims which are specifically
exempted by the contractor to be set forth
therein. Unless otherwise provided in this
subagreement, by State law or otherwise ex-
pressly agreed to by the parties to this sub-
agreement, final payment under this sub-
agreement or settlement upon termination
of this subagreement shall not constitute a
waiver of the owner's claims against the
contractor or his sureties under this sub-
agreement or applicable performance and
payment bonds.
[48 FR 12926. Mar. 28. 1983; 48 FR 30365.
July 1. 1983]
Subpart G—Protests
§33.1105 Applicability and scope of this
subpart.
This subpart sets forth EPA's ad-
ministrative process for the rapid reso-
lution of protest appeals filed with the
award official.
§33.1110 Recipient protest procedures.
(a)	Recipients must establish their
own procedures for prompt consider-
ation of initial protests concerning
their solicitations or subagreement
awards. A "protest" is a written com-
plaint concerning the recipient's solici-
tation or award of a subagreement. It
must be filed with the recipient by a
party with a direct financial interest
adversely affected by a recipient's pro-
curement action (see § 33.1130
"Review of protest appeal").
(b)	The recipient should review each
protest received to determine whether
335
-------
§33.1115
40 CFR Ch. I (7-1-86 Edition)
it is appropriate to defer the protested
procurement action.
(c) If the recipient does not defer
the procurement action, it assumes
the risk that the award official may
disallow the cost of the protested pro-
curement action if the protest appeal
is upheld.
[48 FR 12926. Mar. 28. 1983: 48 FR 30365,
July 1. 1983]
§ 33.1115 Protest appeal.
(a)	A party with a financial interest
which is adversely affected by the re-
cipient's decision on the initial protest
may file a "protest appeal" with the
award official.
(b)	A "protest appeal" is a written
complaint filed with the award official
regarding the recipient's determina-
tion of a protest.
§ 33.1120 Limitations on protest appeals.
(a)	The award official shall not
accept a protest appeal until the pro-
tester has exhausted all administrative
remedies at the recipient level.
(b)	A protest appeal is limited to the
following:
(1)	Issues arising under the procure-
ment provisions of this part, or
(2)	Alleged violations of State or
local law or ordinances where the
award official determines that there is
an overriding Federal requirement.
(c)	A recipient of a lower tier sub-
agreement (subcontract) may only file
a protest appeal for issues which
relate to the award of a subagreement
by a contractor (see § 33.295 "Suba-
greements awarded by a contractor").
S 33.1125 Filing requirements.
(a)	Protest appeals must be filed
with the Assistant General Counsel
for Grants for headquarters-awarded
assistance agreements and with the
Office of Regional Counsel for region-
ally awarded assistance agreements.
(b)	A protest appeal must:
(1)	Be written:
(2)	Include a copy of the recipient's
determination of the protest:
(3)	State the basis for the appeal:
and
(4)	Request a determination under
this subpart.
(c)	Upon filing a protest appeal with
the Regional Counsel or Assistant
General Counsel for Grants, as appro-
priate, the party filing the protest
appeal must concurrently transmit a
copy of all protest documents and any
attachments to all other parties with a
direct financial interest which may be
adversely affected by the determina-
tion of the protest appeal.
(d)	The award official will only con-
sider written protest appeals received
by the appropriate Counsel's office
within seven calendar days after the
adversely affected party receives the
recipient's determination of protest.
However, the adversely affected party
can meet the seven-day notice require-
ment by telegraphing the Counsel
within the seven-calendar-day period
of its intent to file a protest appeal,
provided the adversely affected party
submits a complete protest appeal
within seven calendar days of the date
it sends the telegram. If the seventh
day falls on a Saturday. Sunday or
holiday, the next working day shall be
the last day to submit a protest
appeal.
(e)	Any party which submits a docu-
ment to the award official during the
course of a protest appeal must simul-
taneously furnish all other affected
parties with a copy of the document.
[48 FR 12926, Mar. 28. 1983: 48 FR 30365,
July 1. 1983]
6 33.1130 Review of protest appeal.
(a)	If the recipient does not receive
the initial protest before bid opening
or the closing date for receipt of pro-
posals. the award official may dismiss
as untimely any protest appeal based
upon alleged improprieties in the solic-
itation which were clearly apparent
before bid opening or before the dead-
line for receipt of initial proposals. In
negotiated procurements, protests of
alleged improprieties which were in-
corporated in a new solicitation must
have been received by the recipient by
the closing date for receipt of propos-
als for the new solicitation.
(b)	In cases not involving impropri-
eties in the solicitation, the award offi-
cial may dismiss as untimely a protest
appeal if the adversely affected party
did not file the initial protest with the
recipient within seven calendar days
of the date the basis for the protest
336
-------
Environmental Protection Agency
was known or should have been
known, whichever is earlier.
§ 33.1140 Deferral of procurement action.
When the award official receives a
protest appeal and the recipient has
not deferred the procurement action
under § 33.1110(b), the award official
must promptly request that the recipi-
ent defer the protested procurement
action until the award official notifies
the recipient of the formal or informal
resolution of the appeal. The request
shall be limited to the award of the
subagreement or subitem which is the
basis of the protest appeal.
§ 33.1145 Award official's review.
(a)	The award official may establish
rules of procedures or deadlines for
the submission of materials or the ar-
rangement of protest appeal confer-
ences.
(b)	The award official may summari-
ly dismiss an appeal without proceed-
ings under this subpart if:
(1)	The protest appeal is not re-
viewable, see § 33.1130, or addresses
issues other than those allowed under
§ 33.1120(b):
(2)	The protester substantially fails
to comply with the procedural require-
ments of this subpart: or
(3)	The protester does not agree to
the recipient's request for a reasonable
extension of the bid and bond period.
(c)	The award official may summari-
ly deny a protest appeal without pro-
ceedings under this subpart if. after
considering the facts in a light most
favorable to the protester, the award
official believes that the protest lacks
merit.
(d)	The award official will give both
the recipient and the protester, as well
as any other party with a financial in-
terest which may be adversely affected
by the determination of protest, an op-
portunity to present arguments in sup-
port of their views in writing or at a
conference.
(e)	After the announced date for re-
ceipt of written arguments, the record
shall be closed.
(f)	The award official shall review
the record considered by the recipient
and any other documents or argu-
ments presented by the parties to de-
termine whether the recipient has
Pt. 33, App. A
complied with the procurement re-
quirements of this part and has a ra-
tional basis for its determination of
protest.
(g)	The award official's determina-
tion shall constitute final EPA action
from which there shall be no further
administrative appeal. No party may
appeal an award official's determina-
tion of appeal to the EPA Board of As-
sistance Appeals.
(h)	Nothing In this subpart pre-
cludes the award official from review-
ing the recipient's procurement action.
(See § 33.115.)
(i)	Noncompliance with the award
official's determination of protest
shall be cause for an action against
the recipient under 40 CFR Part 30 or
32.
(j) If an appeal involves legal issues
not explicitly addressed by this part,
the award official shall resolve the
issue by referring to other protest de-
terminations under this section and
decisions of the Comptroller General
of the United States or of the Federal
courts addressing Federal require-
ments comparable to procurement re-
quirements of this part.
Appendix a—Procedural Require-
ments for Recipients Who Do Not
Certify Their Procurement Sys-
tems, or for Recipients Who Have
Their Procurement Certifications
Revoked By EPA
(a)	The following procedural requirements
apply to recipients who:
(1)	Do not certify to EPA that their pro-
curement system meets the minimum pro-
curement requirements in this part, or
(2)	Have their procurement certification
revoked by the award official, as stated in
ft 33.115(c).
(b)	Those recipients must comply with the
requirements in this part plus the following
procedural requirements. These procedural
requirements supplement the requirements
in the sections cited.
(1)	To comply with I 33.250, "Documenta-
tion." the recipient must submit to the
award official, unless he instructs otherwise,
the records required by this section.
(2)	To comply with 5 33.290, "Cost and
price considerations." the recipient's con-
tractors and subcontractors must submit
their cost or price data on EPA Form 5700-
41, "Cost or Price Summary Format for
Subagreements Under U.S. EPA Grants." or
337
-------
Part 35
40 CFR Ch. I (7-1-86 Edition)
In another format which provides informa-
tion similar to that required by EPA Form
5700-41.
(3)	To comply with $ 33.415, "Time for
preparing bids," the recipient must allow at
least 30 days between the date when it first
publishes the public notice and the date by
which bids must be submitted.
(4)	To comply with § 33.410, "Public notice
and solicitation of bids," the recipient must
publish the notice in professional journals,
newspapers, or publications of general circu-
lation over a reasonable area for at least 30
days before bid opening.
(5)	To comply with S 33.510, "Adequate
public notice," the recipient must publish
the notice in professional journals, newspa-
pers. or publications of general circulation
over a reasonable area for at least 30 days
before the deadline for receipt of proposals.
The recipient may use posted public notices
or written notification directed to interested
persons, firms or professional organizations.
[48 FR 12926, Mar. 28. 1983; 48 FR 30365,
July 1, 1983]
Editorial Note For a class deviation doc-
ument affecting Appendix A paragraphs (b)
(3) and (4) to this Part 33. see 50 FR 24876,
June 13. 1985.
PART 35—STATE AND LOCAL
ASSISTANCE
Sec.
35.001	Applicability.
Subpart A—Financial Aiintonn for Continuing
Environmental Programs
35.100	Purpose.
35.105	Definitions.
35.110	Summary of annual process.
35.115	State allotments and reserves.
35.120	Planning targets.
35.125	Program guidance.
35.130	Work program.
35.135	Budget period.
35.140	Application for assistance.
35.141	EPA action on application.
35.143	Assistance amount.
35.145	Consolidated assistance.
35.150	Evaluation of recipient perform-
ance.
35.155	Reallocation.
Air	Pollution Control (Section 105)
35.200	Purpose.
35.205	Maximum Federal share.
35.210	Maintenance of effort.
35.215	Limitations.
Sec.
Water Pollution Control (Section 106)
35.250 Purpose.
35.255 Maintenance of effort.
35.260 Limitations.
State Administration (Section 205(G))
35.300 Purpose.
35.305 Maintenance of effort.
35.310 Limitations.
Water Quality Management Planning
(Section 205(J))
35.350 Purpose.
35.355 Maximum Federal share.
35.360 Limitations.
Public Water System Supervision
(Section 1443(A))
35.400 Purpose.
35.405 Maximum Federal share.
35.410 Limitations.
Underground Water Source Protection
(Section 1443(B))
35.450 Purpose.
35.455 Maximum Federal share.
35.460 Limitations.
Hazardous Waste Management (Section
3011)
35.500 Purpose.
35.505 Maximum Federal share.
35.510 Limitations.
Pesticide Enforcement (Section 23(a)(1))
35.550 Purpose.
35.555 Maximum Federal share.
Pesticide Applicator Certification and
Training (Section 23(a)(2))
35.600 Purpose.
35.605 Maximum Federal share.
Subpart B—(Beeerved]
Subpart C—Grants for Construction of
Wastewater Trootwnt Works
35.U00 Purpose.
35.801 Authority.
35.805 Definitions.
35.805-1 Construction.
35.805-2 Intermunicipal agency.
35.805-3 Interstate agency.
35.805-4 Municipality.
35.805-5 State.
35.805-6 State water pollution control
agency.
35.805-7 Treatment works.
35.810 Applicant eligibility.
35.815 Allocation of funds.
35.815-1 Allotments to States.
35.815-2 Reallotment.
338
-------
4
-------
ATTACHMENT 0
Circular No. A-102
PROCUREMENT STANDARDS-
1.	Applicability
a.	This Attachment establishes standards and guidelines for
the procurement of supplies, equipment, construction' and services
for Federal assistance programs. These standards are furnished
to ensure that such materials and services are obtained
efficiently and economically and in compliance with the
provisions of applicable Federal law and executive orders.
b.	No additional procurement requirements or subordinate
regulations shall be imposed upon grantees by executive agencies
unless specifically required by Federal law or executive orders
or authorized by the Administrator for Federal Procurement
Policy. This prohibition is not applicable to payment conditions
issued in accordance vith Treasury Circular- 1075, individual
grantee requirements pursuant to Section 10 of the basic circular
or the provisions of this.or other 0MB circulars.
c.	Provisions of. current subordinate requirments not
conforming to tlus Attachment shall :be rescinded by grantor
agencies unless approved by the Office of Federal- Procurement
Policy (OFPP).
2.	Grantee/Grantor Responsibility
a.	These standards do not relieve the grantee of any
contractual responsibilities under its contracts. The grantee is
responsible, in accordance with good administrative practice and
sound business judgment, for the settlement o£ all contractual
and administrative issues arising out of procurements entered in
support of a grant. These include but are not limited to source
evaluation, protests, disputes, and claims. Executive agencies
shall not substitute their judgment for that of • the grantee
unless the matter is primarily a Federal concern. Violations of
law are to be referred to the local, State, or Federal authority
having proper jurisdiction.
b.	Grantees shall use their own procurement procedures
which reflect applicable State and local 1-aws and regulations,
provided that procurements, for „ Federal" Assistance Programs
(No. A-102)
-------
2
conform to the standards set forth in this Attachment and
applicable Federal law.
3 . Grantee Procurement Improvement
Executive agencies awarding Federal grants or other
assistance which require- or allow for procurement by the
recipients are encouraged to assist recipients in improving their
procurement capabilities by providng them with technical
assistance training, publications, and other aid.
4. Procurement System Reviews
a. Executive agencies are encouraged to perform reviews of
their grantees' procurement systems If a continuing relationship
with the grantee is anticipated or a substantial amount of the
Federal assistance is to be used for procurement and review of
individual contracts is anticipated. The purpose of the review
shall be to determine: (1) whether a grantee's procurement system
meets the standards prescribed by this Attachment or other
criteria acceptable to the OFPP, such provisions of the Model
Procurement Code for State and local government; and (2) whether
the grantee's procurement system should be certified by the
reviewing agency. Such a review will also give an agency an
opportunity to give technical assistance to a grantee to remedy
its procurement system if it does not fully comply. In addition,
such a review may provide a basis for deciding whether the
grantee's contracts and related procurement documents should be
subject to the grantor's prior approval, as provided by Section
6.
b.	In conducting procurement system review, grantor
agencies will evaluate a grantee's procurement system in terms of
whether it complies with the standards prescribed by this
Attachment and represent? a fair, efficient and effective
procurement system. To the maximum extent feasible, reviewers
will rely upon State or local evaluations and analyses performed
by agencies or organizations independent of the grantee
contracting activity.
c.	When a Federal grantor agency completes a procurement
review, it shall furnish a report to the grantee, with a copy to
OFPP.
d. All agencies should normally rely upon the resultant
findings or certification for a period of 24 months before
another review is performed.
(No. A-102)
-------
3
e.	Reviews shall be conducted in accordance .with standards
and guidelines approved or issued by OFEP.
f.	The reviews authorized by Section 6 are waived if a
grantee's procurement system is certified.
5.	Protest Procedures
a. Grantor agencies may develop an administrative procedure
to handle complaints or protests regarding grantee contractor
selection actions. The procedure shall be limited as follows:
a.	No protest shall be accepted by the grantor agency until
all administrative remedies at the grantee level have been
exhausted.
b.	Review is limited to:
(i)	Violations of Federal law or regulations. Violations of
State or local law shall be under the jurisdiction of State or
local authorities.
(ii)	Violations of grantee's protest procedures or failure to
review a complaint or protest.
6.	Grantor Review of Proposed Contracts
Federal grantor pre-award review and approval of the
grantee's proposed contracts and related procurement documents,
such as requests for proposal and invitations for bids, is
permitted only under the following circumstances:
a.	The procurement is expected to exceed $10,000 and is to
be awarded without competition or only one bid or offer is
received in response to solicitation.
b.	The procurement expected to exceed $10,000 specifies a
"brand name" product; or
c.	The grantee's procurement procedures or operation fails
to comply with one or more significant aspects of this
Attachment. The grantor agency shall notify the grantee in
writing, with a copy of such notification to the OFPP.
7.	Code of Conduct
(No. A-102)
-------
4
Grantees shall maintain a written code or standards of
conduct which shall govern the performance of their officers,
employees or agents engaged in the award and administration of
contracts supported by Federal funds. No employee, officer or
agent of the grantee shall participate in selection, or in the
award .or administration of a contract supported by Federal funds
if a conflict of interest, real or apparent, would be involved.
Such a conflict would arise when:
a.	The employee, officer or agent;
b.	Any member of his immediate family;
c.	His or her partner; or
d. An organization which employs, or is about to employ,
any of the above, has a financial or other interest in the firm
selected for award.
The grantee's officers, employees or agents shall neither
solicit nor accept gratuities, favors or anything of monetary
value from contractors, potential contractors, or parties to
subagreements.
Grantees may set minimum rules where the financial interest
is not substantial or the gift is an unsolicited item of nominal
intrinsic value.
To the extent permitted by State or local law or regulations,
such standards of conduct shall provide for penalties, sanctions,
or other disciplinary actions for violations of such standards by
the grantee's officers, employees, or agents, or by contractors
or their agents.
8. Procurement Procedures
The grantee shall establish procurement procedures which,
provide that proposed procurement actions shall be reviewed by
grantee officials to avoid the purchase of unnecessary or
duplicative items. Consideration should be given to
consolidation or breaking out to obtain a more economical
purchase. Where appropriate, an analysis shall be made of lease
versus purchase alternatives, and any other appropriate analysis
tc determine which approach would be the most economical. To
foster greater economy and efficiency, grantees are encouraged to
enter into State and local intergovernmental agreements fcr
procurement or ase of common goods and services.
(No. A-1C2)
-------
5
9.	Contracting with Small and Minority Firms, Women's Business
Entersnse and Labor Surplus Area Firms
a.	It is national policy to award a fair share of contracts
to small and minority business firms. Accordingly, affirmative
steps must be taken to assure that small and minority businesses
are utilized when possible as sources of suppliers, equipment,
construction and services. Affirmative steps shall include the
following:
(1)	Including qualified small and minority businesses on
solicitation lists.
(2)	Assuring that small and minority businesses are
solicited whenever they are potential sources.
(3)	When economically feasible, dividing total requirements
into smaller tasks or quantities so as to permit maximum small
and minority business participation.
(4)	Where the requirement permits, establishing delivery
schedules which will encourage participation by small and
minority business.
(5)	Using the services and assistance of the Small Business
Administration, the Office of Minority Business Enterprise of the
the Department of Commerce and the Community Services
Administration as required.
(S) If any subcontracts are to be let, requiring the prime
contractor to take the affirmative steps in 1 through 5 above.
b.	Grantees shall take similar appropriate affirmative
action in support of women's business enterprises.
c.	Grantees are encouraged to procure goods and services
from labor surplus areas.
d.	Grantor agencies may impose additional regulations and
requirements in the foregoing areas only zo the extent
specifically mandated by statute or presidential direction.
10.	Selection Procedures
a. All procurement transactions, regardless of whether by
sealed bids or by negotiation and without regard to dollar value,
shall be conducted in a manner that provides maximum open and
A-132)
-------
6
free competition consistent with this Attachment.. Procurement
procedures shall'not restrict or eliminate competition. Example
of what is considered to be restrictive of competition include,
but are not limited to: (1) placing unreasonable requirements on
firms, in order for them to qualify to do business; (2)
noncompetitive practices between firms; (3) organizational
conflicts of. interest; and (4) unnecessary experience and bonding
requinnents.
b. The grantee shall Jiave written selection procedures
which shall provide, as a minimum, the following procedural
requi rements:
(1)	Solicitations of offers, whether by competitive sealed
bids or competitive negotiation shall:
(a)	Incorporate a clear and accurate description of the
technical requirements for the material, product, or service to
be procured. Such description shall not, in competitive
procurements, contain features which unduly restrict competition.
The description may include a statement of the qualitative nature
of the material, product or service to be procured, and when
necessary, shall set forth those minimum essential
characteristics and standards to which it must 'conform if it is
to satisfy its intended use. Detailed product specifications
should be avoided if at all possible. When it is impractical or
uneconomical to make a clear and accurate description of the
technical requirements, a "brand name or equal" description may
be used as a means to define the performance ' or other salient
requirements of a procurement. The specific features of the
named brand which must be met by offerors shall be clearly
stated.
(b)	Clearly set forth all requirements which offerors must
fulfill and all other factors to be used in evaluating bids or
proposals.
(2)	Awards shall be made only to responsible contractors
that possess the potential ability to perform successfully under
the terms and conditions of a proposed procurement.
Consideration shall be given to such matters as contractor
integrity, compliance with public policy, record of past
performance, and financial and technical resources.
11. Method Procurement
(No. A-102)
-------
7
Procurement under grants shall be made by one of the
following methods, as described herein: (a) small purchase
procedures; (b) competitive sealed bids (formal advertising); (c)
coroneritive negotiation; (d) noncompetitive negotiation.
a.	Small purchase procedures are those relatively simple
and informal procurement methods that are sound and appropriate
for a. procurement, of services, supplies or other property,
costing in .the aggregate not more than $10,000. Grantees shall
comply with State or local small purchase dollar limits under
$10,000. If small purchase procedures are used for a .procurement
under a grant, price or rate quotations shall be obtained from an
adequate number of qualified sources.
b.	In competitive sealed bids (formal advertising), sealed
bids are publicly-solicited and a firm-fixed-price contract (lump
sxim or unit price) is awarded to the responsible bidder whose
bid, conforming with all the material terms and conditions of the
invitation for bids, is lowest in price.
(1)	In order for formal advertising to be feasible,
appropriate conditions must be present, including, as a minimum,
the following:
(a)	A complete, adequate and realistic specification or
purchase description is available.
(b)	Two or more responsible- suppliers are willing .and able
to compete effectively for the grantee's business.
(c)	The procurement lends itself to a firm-fixed-price
contract, and selection of the successful bidder can
appropriately be made principally on the basis of price.
(2)	If formal advertising is used for a procurement under a
grant the following requirements shall apply:
(a)	A sufficient time prior to the date set for opening of
bids, bids shall be solicited from an adequate number of known
suppliers. In addition, the invitation shall be publicly
advertised.
(b)	The invitation for bids, including specifications and
pertinent attachments, shall clearly define the items or services
needed in order for the .bidders to. properly respond to the
invitation.
(No. A-102)
-------
(c)	All bids shall be opened publicly at the time and place
stated in the invitation for bids.
(d)	A finn-fix-price contract award shall be made by vritten
notice to that responsible bidder whose bid, conforming to the
invitation for bids, is lowest. Where specified in the bidding
documents, factors such as discounts, transportation costs and
life cycle costs shall be considered in determining which bid is
lowest. Payment discounts may only be used to determine low bid
when prior experience of' the grantee indicates that such
discounts are generally taken.
(e)	Any or all bids may be rejected when there are sound
documented business reasons in the best interest of the program.
c. In competitive negotiation, proposals are requested from
a number of sources and the Request for Proposal is publicized,
negotiations are normally conducted with more than one of the
sources submitting offers, and either a fixed-price or
cost-reimbursable type contract is awarded, as appropriate.
Competitive negotiation may be used if conditions are not
appropriate for the use of formal advertising. If competitive
negotiation is used for a procurement under a grant, tt
following requirements shall apply:
(1)	Proposals shall be solicited from an adequate number of
qualified sources to -• permit reasonable competition consistent
with the nature and requirements of the procurement. The Request
for Proposal shall be publicized and reasonable requests by other
sources to compete shall be honored to the maximum extent
practicable.
(2)	The Request for Proposal shall identify all significant
evaluation factors, including price or cost where required and
their relative importance.
(3)	The	grantee shall provide mechanisms for technical
evaluation	of the proposals received, determinations of
responsible	offerors for the purpose of written or oral
discussions,	and selection for contract award.
(4)	Award may be made to the responsible offeror whose
proposal will be most adavantageous to the procuring party, price
and other factors considered. Unsuccessful offerors should be
notified promptly.
(Mo. A-102)
-------
9
(5) Grantees may utilize competitive negotiation procedures
for procurement of architectural/engineering professional
services, whereby competitors' qualifications are evaluated and
the most qualified competitors' is selected, subject to
negotiation of fair and reasonable compensation.
d.	Noncompetitive negotiation is procurement through
solicitation of a proposal from only one source, or after
soliciation of a number of sources, competition is determined
inadequate. Noncompetitive .negotiation may be used when the
award of a contract is infeasible under small purchase,
competitive bidding (formal advertising) or competitive
negotiation procedures. Circumstances under which a contract may
be awarded by noncompetitive negotiation are limited to the
following:
(1)	The item is available only from a single source;
(2)	Public exigency or emergency when the urgency for the
requirement will not permit a delay incident to competitive
solicitation;
(3)	' The Federal grantor agency authorizes noncompetitive
negotiation; or
(4)	After soliciation of a number of sources, competition is
determined inadequate.
e.	Additional innovative procurement methods may be used by
grantees with the approval of the grantor agency. A copy of such
approval shall be sent to the OF??.
12.	Contract Pricing
The cost plus a percentage of cost and percentage of
construction cost method of contracting shall not be used.
Grantees shall perform some form of cost or price analysis in
connection with every procurement action including contract
modifications. Costs or prices based on estimated costs for
contracts under grants shall be allowed only to the extent that
costs incurred or cost estimates included in negotiated prices
are consistent with Federal cost principles.
13.	Grantee Procurement Records
Grantees shall maintain records sufficient to detail the
significant history of a procurement. These records shall
(No. A-102)
-------
10
include, but are not necessarily limited to information pertinent
to the following: rationale for the method of procurement,
selection of contract type, contractor selection or rejection,
and the basis for the cost or price.
14. Contract Provision
In addition to provisions defining a sound and complete
procurement contract, any recipient of Federal grant funds shall
include the following contract provisions or conditions in all
procurement contracts and subcontracts as required by the
provision, Federal law or the grantor agency.
a.	Contracts other than small purchases shall contain
provisions or conditions which will allow for administrative,
contractual, or legal remedies in instances where contractors
violate or breach contract terms, and provide for such sanctions
and penalties as may be appropriate.
b.	All contracts in excess of $10,000 shall contain
suitable provisions for termination by the grantee including the
manner by which it will be effected and the basis for settlement.
In addition, such contracts shall describe conditions under which
the contract may be terminated for default as well as conditions
where the contract may be terminated because of circumstances
beyond the control of the contractor.
c.	All contracts awarded in excess of $10,000 by grantees
and their contractors or subgrantees shall contain a provision
requiring compliance with Executive Order 11246, entitled "Equal
Employment Opportunity," as amended by Executive Order 11375, and
as supplemented in Department of Labor regulations (41 CFR Part
60) .
d.	All contracts and subgrants for construction or repair
shall include a provision for compliance with the Copeland "Anti-
Kickback" Act (18'VSC 874) as supplemented in Department of Labor
regulations (29 CFR, Part 3). This Act provides that each
contractor or subgrantee" shall be prohibited from inducing, by
any means, any person employed in the construction, completion,
or repair of public work, to give up any part of the compensation
to which he is otherwise entitled. The grantee shall report all
suspected or reported violations to the grantor agency.
e.	When required by the Federal grant program legislation,
all construction contracts in excess of $2,000 awarded by
grantees and subgrantees shall include a provision for compliance
(No. A-102)
-------
11
with the Davis-Bacon Act (40 USC 276a to a-7) as supplemented by
Department of Labor regulations (29 CFR, Part 5). Under this Act
contractors shall be required to pay wages to laborers and
mechanics at a rate not less than the minimum wages specified in
a wage determination made by the Secretary of Labor. In
addition, contractors shall be required to pay wages not less
often than once a week. The grantee shall place a copy of the
current prevailing wage detennination issued by the Department of
Labor in each solicitation and the award of a contract shall be
conditioned upon the acceptance of the wage determination. The
grantee shall report all suspected or reported violations to the
grantor.agency.
f.	Where applicable, all contracts awarded by grantees and
subgrantees in excess of $2,000 for construction contracts and in
excess of $2,500 for other contracts which involve the employment
of mechanics or laborers shall include a provision for compliance
with Sections 103 and 107 of the Contract Work Hours and Safety
Standards Act (40 USC 327-330) as supplemented by Department of
Labor regulations (29 CFR, Part 5). Under Section 103 of the
Act, each contractor shall be required to compute the wages of
every mechanic and laborer on the basis of standard workday of 8
hours and a standard workweek of 40 hours. Work in excess of the
standard workday or workweek is permissible provided that the
worker is compensated at a rate of not less than 1-1/2 times the
basic rate of pay for all hours worked in excess of 8 hours in
any calendar day or 40 hours in the work week. Section 107 of
the Act is applicable to construction work and provides that no
laborer or mechanic shall be required to work in surroundings or
under working conditions which are unsanitary, hazardous, or
dangerous to his health and safety as determined under
construction, safety and health standards promulgated by the
Secretary of Labor. These requirements do not apply to the
purchases of supplies or materials or articles ordinarily
available on the open market, or contracts for transportation or
transmission of intelligence.
g.	The contract shall include notice of grantor agency
requirements and regulations pertaining to reporting and patent
rights under any contract involving research, developmental,
experimental or demonstration work with respect to any discovery
or invention which arises or is developed in the course of or
under such contract, and of grantor agency requirements and
regulations pertaining to copyrights and rights in data.
h.	All negotiated contracts (except those awarded by small
purchase procedures) awarded by grantees shall include a
(No. A-102)
-------
17
provision to the--effect that the grantee, the Federal grantor
agency, the Comptroller General of the Uiiited States, or any of
their duly authorized representatives, shall have' access to any
books, documents, papers, and records of the contractor which are
directly pertinent to that specific contract, for' the purpose of
making audit, examination, excerpts, and transcriptions.
Grantees shall require contractors to maintain all
required records for three years after grantees make final
payments and all other pending matters are closed.
i. Contracts, subcontracts, and subgrants of amounts in
excess of $100,000 shall contain a provision which requires
compliance with all applicable standards, orders, or requirements
issued under Section 306 of the Clean-Air Act (42 USC 1857(h)),
Section 508 of the Clean Water Act (33 USC 1368), Executive Order
11738, and Environmental Protection Agency regulations (40 CFR,
Part 15), which prohibit the use under non-exempt Federal
contracts, grants or loans of facilities included on the EPA List
of Violating Facilities. The provision shall require reporting
of violations to the grantor agency and to the USEPA Assistant
Administrator for Enforcement (EN-329).
j. Contracts shall recognize mandatory standards	and
policies relating to energy efficiency which are contained in the
State energy conservation plan issued in -compliance with the
Energy Policy and Conservation Act (P.L. 94-163).
Grantor agencies are permitted to require changes,
remedies, changed conditions, access and record retention and
suspension of work clauses approved by the Office of Federal
Procurement Policy.
15. Contract Adm i ni strati on
Grantees shall maintain a contract administration system
ensuring that contractors perform in accordance with the terms,
conditions, and specifications of their contracts or purchase
orders.
(No. A-102)
-------
5
-------
Federal Register / Vol. 53. No. 48 / Friday. March 11. 1988 / Rules and Regulations
8073
ENVIRONMENTAL PROTECTION
AGENCY
40 CFR Parts 30,31, and 33
[FRL 3320-9]
FOR FURTHER INFORMATION CONTACT
Richard Mitchell, Grants Policy and
Procedures Branch (PM-216F), United
States Environmental Protection
Agency. 401 M Street SW., Washington.
DC 20460. (202) 382-5297 (This is not a
toll free number.)
ADDITIONAL SUPPLEMENTARV
INFORMATION: On March 12.1987,
President Reagan directed all Federal
assistance awarding agencies to publish
for State and local government grantees
"common regulations that adopt the
government-wide terms and conditions
verbatim (emphasis added), except
where there are inconsistent statutory
requirements." The President's directive
calls for promulgation of the final rule
on March 11.1988. To that end. Federal
Agencies are jointly publishing a
common rule to establish consistency
and uniformity among all Federal
assistance awarding agencies in the
administration of grants and cooperative
agreements to State, local, and federally
recognized Indian tribal governments.
The common rule, as part of the
President's regulatory relief program, is
further designed to reduce the burden of
regulation and paperwork for the
Environmental Protection Agency's
(EPA) grantees. When effective (on
October 1.1988), this rule will become
40 CFR Part 31 and will supersede
certain of EPA's general assistance
regulations at 40 CFR Parts 30 and 33.
In the Federal Register of fune 9.1987,
EPA. along with other agencies,
published its proposed agency-specific
preamble to the common nile. EPA's
preamble discussed certain proposed
additiions to the rule and changes to the
current 40 CFR Parts 30 and 33. These
additions/changes will be applicable
only to grants and cooperative
agreements awarded by EPA. EPA
requested that its readers comment on
the proposed additons/changes. EPA
received no comments specifically
addressing our proposed additions/
changes. The Office of Management and
Budget (OMB). however, received a
number of comments on the common
rule itself. Those comments and their
reconciliation are discussed in detail in
the common preamble to the rule.
-------
8074
Federal Register / Vol. 53. No. -48 / Friday. March 11, 1988 / Rules and Regulations
published in conjunction with this
notice.
In the June 9,1987. Federal Register
EPA indicated that, after the effective
date of the common rule, our general
assistance regulation at 40 CFR Part 30
would consist of two Subparts: Subpart
A. the common rule with EPA's
additions; and Subpart B. the current
Part 30 paragraphs applicable to
grantees other than State and local
governments. Subsequent to that
publication, it was determined that such
a format might be confusing. Therefore.
EPA has decided to publish the common
rule with EPA's additions at 40 CFR Part
31. Part 31 will be applicable to State,
local and federally recognized Indian
tribal governments. Part 30 will be
revised so as to consist of those
paragraphs which are applicable to
grantees other than State and local
governments.
Inasmuch as no negative comments-
were received on EPA's other proposed
additions/changes as discussed in the
June 9.1987. Federal Register, they are
being adopted.
Following is a summary of EPA's
additions/changes:
The common rule with EPA's
additions will become 40 CFR Part 31
and will be applicable to State, local
and federally recognized Indian tribal
governments. 40 CFR Pan 30 will consist
of those paragraphs of the current Part
30 which are applicable to grantees
other than State and local governments.
The additions which are part of the
common rule at Part 31 include:
(1)	A list of the principal
c-n\ irorunental statutory provisions
applicable to EPA assistance programs.
This iist is a! § 31.13.
(2)	Buy American. 40 CFR 33.710
{required by section 215 of the Clean
Wdter Act) is par! of § 31.36 at
subparagraph (c)(5) ar.d applies only to
the wastewater treatment construction
grants program.
(3)	Payments to Consultants. 40 CFR
33.280 (required by Pub. L. 99-591) is
part of § 31.36 at subparagraph (j).
(4)	Quality Assurance. 40 CFR 30.503.
Man> of EPA's grant awards involve the
development and use of scientific and
technical data. Reports, findings, data,
etc.. developed under such grants are
used for a variety of purposes, each
having a potential for wide-ranging
environmental impacts Beause of the
sensitive nature of these impacts, it is
imperative that EPA's grantees develop
a quality assurance program designed to
ensure that the pro]ect will result in the
nighest quality scientific and technical
data possible. This will be § 31.45.
(5)	40 CFR Part 30. Subpart L. "How
.ire Disputes Between EPA Officials and
Me Resolved?" is 40 CFR Part 31.
Subpart F; Disputes.
(6) 40 CFR Part 30. Appendix E—Part
30 Audit Requirements for State and
Local Government Recipients, will
become 40 CFR Part 31. Appendix A—
Audit Requirements for State and Local
Government Grantees.
EPA's Part 30 contains those sections
of current 40 CFR Part 30 which will be
applicable to grantees other than State
and local governments (i.e.. institutions
of higher education, hospitals, or other
nonprofit organizations). Listed below
are those sections of the current 40 CFR
Part 30 which are deleted. Those
sections not listed will remain at 40 CFR
Part 30 (for grantees other than State
and local governments) and are
renumbered as appropriate.
40 CFR
§33. Subpart E.
40 CFR
Reason for ddooon/revision
§ 30 302(d) (21 and
(3).
§ 30.501(a)(2) _
40 CFP
$23 i iCle)(5i ...
5 30 210(11..
§ 33. Suooan f.
§33 1021 and
533.1030.
paragraphs 3. 4.
and 12.
Reason for Deletion
Detele this Subpart beer
it a applicable pnly ti
medial acupn aw.
under CERCLA and A.
nol required lor gramaes
other man State and local
governments
Delete mese provisions m
Subpart F because rney
Oo not apply to uiaumuma
ot higher education, hos-
pitals. and other nonprofit
organizations.
Application requirements (or
State and local govern-
ments only.
State and local requirement
tor submitting Financial
Status Report (SF269).
§ 30 503 (e). (g). and State and local requirement
(h).	tor submitting a quality as-
surance plan
§30.505(bM2) 		 Report submittal required
only tor construction gram
protects.
§ 30 540(b) and	Requirements lor audits of
Appendix E.	State and local govern-
ments only.
Publication of the common rule
requires changes in our current
regulation at 40 CFR Part 33.
Procurement Under Assistance
Agreements, to delete or revise certain
sections which are applicable only tQ.
State and local governments and.
therefore, are superseded by the
common rule. Those remaining are
applicable only to institutions.of higher
education hospitals, and other nonprofit
organizations. Listed below are those
sections which EPA is deleting or
re\ ising-
t 33 SuDDar C
Reason for Deienon
Delete this section because
u is a procurement re-
quirement related only to
Supertund remedial action
construction awards.
Delete tn»s section as n re-
lates to torrnai advening
only lor remedial action
awards unoer ttie Com-
prenenswe Environmental
Response Compensation,
ano liaoiiity Act ot 1980
(CERCLA)
Delete tnis Subpan because
u is aopiicabie only to tne
wastewater treatment
consuuction grant pro-
Oram
In the June 9.1987, Notice of Proposed
Rulemaking, EPA specifically requested
its readers to comment on two
additional matters being considered for
inclusion in the common rule. These
were:
(1)	The current 40 CFR Part 30,
Subpart I includes a provision for
annulling assistance agreements IT the
grantee, without good cause,
inordinately delayed or made no
substantial progress on the project,
obtained the award by fraud or
misrepresentation, or practices corrupt
administrative procedures. Annulment
can result in recovery of all funds
received for the project including those
already expended.
(2)	In the conduct of EPA's
wastewater treatment construction
grants program, grantees may be
allowed to retain the services of the
same architect or engineer during
subsequent work on the project. This
provision has been invaluable in this
program as it helps ensure continuity
through the life of a project since the
architect or engineer is familiar with the
project and it minimizes procurement
actions for the grantee.
Since no negative comments were
received. EPA is adding these provisions
to EPA's version of the common rule.
The information collection requirements
for the application procedures in this
rule were approved by OMB under the
Paperwork Reduction Ac!. 44 U S.C.
3501 et seq. (OMB control number 2030-
0020).
List of Subjects in 40 CFR Parts 30. 31,
and 33
Accounting. Administrative practice
and procedures. Grant programs. Grants
Administration. Reporting and
recordkeeping requirements
Title 40 of the Code of Federal
Regulations is amended as set forth
below.
Lee M. Thomas.
-iii/nirnsiTator
March 3. 1988
1. Part 31 is added as set forth at th
end of this document
-------
Federal Register / Vol. 53, No. 48 / Friday, March 11. 1988 / Rules and Regulations	8075
PART 31—UNIFORM ADMINISTRATIVE
REQUIREMENTS FOR GRANTS AND
COOPERATIVE AGREEMENTS TO
STATE AND LOCAL GOVERNMENTS
Subpart A—General
Sec.
31.1	Purpose and scope of this part.
31.2	Scope of subpart.
31.3	Definitions.
31.4	Applicability.
31.5	Effect on other issuances.
31.a	Additions and exceptions.
Subpart B—Pre-Award Requirements
31.10	Forms for applying for grants.
31.11	State plans.
31.12	Special grant or subgrant conditions
for "high-risk" grantees.
Subpart C—Post-Award Requirements
Financial Administration
31.20	Standards for financial management
systems.
31.21	Payment.
31.22	Allowable costs.
31.23	Period of availability of funds.
31.24	Matching or cost sharing.
31.25	Program income.
31-26 Non-Federal audit.
Changes, Property, and Subawards
31.30	Changes.
31.31	Real Property.
31.32	Equipment.
31.33	Supplies.
31.34	Copyrights.
31.33 Subawards to debarred and
suspended parties.
31.38 Procurement.
31.37 Subgrants.
Reports, Record Retention, and Enforcement
31.40	Monitoring and reporting program
performance.
31.41	Financial reporting.
31 42 Retention and access requirements for
records.
31.43	Enforcement.
31.44	Termination for convenience.
Subpart 0—After-The-Grant Requirements
31.50	Closeout.
31.51	Later disallowances and adjustments.
31.52	Collection of amounts due.
Subpart E—Entitlement [Reserved]
Subpart F—Disputes
31.70 Disputes.
Authority: 33 U.S.C. 1251 et seq.: 42 U.S.C.
7401 et seq.: 42 U.S.C. 6901 et seq.: 42 U.S.C
300f et seq.: 7 U.S.C. 136 et seq.: 15 U.S.C.
2601 et seq.: 42 U3.C 9601 et seq.: 20 U.S.C
4011 et seq.: 33 U.S.C. 1401 et seq.
2. Further amend Part 31 as follows:
a. Ajnend § 31.6 by adding new
paragraphs (c)(1) and (d) to read
follows:
§ 31.6 Additions and exception*.
• » » • •
(c) * ' '
(1) In the Environmental Protection
Agency, the Director. Grants
Administration Division, is authorized to
grant the exceptions.
(d) The EPA Director is also
authorized to approve exceptions, on a
class or an individual case basis, to EPA
program—specific assistance
regulations other than those which
implement statutory and executive order
requirements.
b.	Add a new § 31.13 to Subpart B to
read as follows:
S 31.13 Principal environmental statutory
provisions applicable to EPA assistance
awards.
Grantees shall comply with all
applicable Federal laws including:
(a)	Section 306 of the Clean Air Act.
(42 U.S.C. 7606).
(b)	Section 508 of the Federal Water
Pollution Control Act. as amended. (33
U.S.C. 1368).
(c)	Section 1424(e) of the Safe
Drinking Water Act. (42 U.S.C. 300h-
3(e)).
c.	Amend § 31.36 by adding new
paragraphs (c)(5). (j). and (k) to read as
follows:
§31.36 Procurement
«	•	•	•	a
(c) * * *
(5) Construction grants awarded
under Title II of the Clean Water Act are
subject to the following "Boy American"
requirements in paragraphs (c)(5)(iHii>)
of this section. Section 215 of the Clean
Water Act requires that contractors give
preference to the use of domestic
material in the construction of EPA-
funded treatment works.
(i)	Contractors must use domestic
construction materials in preference to
nondomestic material if it is priced no
more than 6 percent higher than the bid
or offered price of the nondomestic
material, including all costs of delivery
to the construction site and any
applicable duty, whether or not
assessed. The grantee will normally
base the computations on prices and
costs in effect on the date of opening
bids or proposals.
(ii)	The award official may waive the
Buy American provision based on
factors the award official considers
relevant, including:
(A)	Such use is not in the public
interest:
(B)	The cost is unreasonable:
(C)	The Agency's available resources
are not sufficient to implement the
provision, subject to the Deputy
Administrator's concurrence:
(D)	The articles, materials or supplies
of the class or kind to be used or the
amcles. materials or supplies from
which they are manufactured are not
mined, produced or manufactured in the
United States in sufficient and
reasonably available commerical
quantities or satisfactory quality for the
particular project: or
(E) Application of this provision is
contrary to multilateral government
procurement agreements, subject to the
Deputy Administrator's concurrence.
(iii) All bidding documents,
subagreements. and. if appropriate,
requests for proposals must contain the
following "Buy American" provision: In
accordance with section 215 of the
Clean Water Act (33 U.S.C. 1251 et seq.)
and implementing EPA regulations, the
contractor agrees that preference will be
given to domestic construction materials
by the contractor, subcontractors,
materialmen and suppliers in the
performance of this subagreement
• • • « *
(j) Payment to consultants.
(1)	EPA will limit its' participation in
the salary rate (excluding overhead)
paid to individual consultants retained
by grantees or by a grantee's contractors
or subcontractors to the maximum daily
rate for a GS-18. (Grantees may.
however, pay consultants more than this
amount). This limitation applies to
consultation services of designated
individuals with specialized skills who
are paid at a daiiy or hourly rate. This
rate does not include transportation and
subsistence costs for travel performed:
grantees will pay these in accordance
with their normal travel reimbursement
practices. (Public Law 99-591)
(2)	Subagreements with firms for
services which are awarded using the
procurement requirements in this part
are not affected by this limitation.
(k) Use of the same architect or
engineer during construction.
(1) If the grantee is satisfied with the
qualifications and performance of the
architect or engineer who provided any
or all of the facilities planning or design
services for a waste-water treatment
works project and wishes to retain that
firm or individual during construction of
the project, it may do so without further
public notice and evaluation of
qualifications, provided:
(i)	The grantee received a facilities
planning (Step 1) or design grant (Step
2). and selected the architect or engineer
in accordance with EPA's procurement
regulations in effect when EPA awarded
the grant; or
(ii)	The award official approves
noncompetitive procurement under
§ 31.36(d)(4) for reasons other than
simply using the same individual or firm
that provided facilities planning or
design services for the project: or
(iii)	The grantee attests that:
-------
8076
Federal Register / Vol. 53, No. 48 / Friday, March 11, 1988 / Rules and Regulations
(A)	The initial request for proposals
clearly stated the possibility that the
firm or individual selected could be
awarded a subagreement for services
during construction: and
(B)	The firm or individual was
selected for facilities planning or design
services in accordance with procedures
specified in this section.
(C)	No employee, officer or agent of
the grantee, any member of their
immediate families, or their partners
have financial or other interest in the
firm selected for award: and
(D)	None of the grantee's officers,
employees or agents solicited or
accepted gratuities, favors or anything
of monetary value from contractors or
other parties to subagreements.
(2)	However, if the grantee uses the
procedures in paragraph (k)(l) of this
section to retain an architect or
engineer, any Step 3 subagreements
between the architect or engineer and
the grantee must meet all of the other
procurement provisions in § 31.36.
d. Section 31.43 is amended by adding
paragraph (a)(3)(i) to read as follows:
§31.43 Enforcement
(a) * * *
(3)	* * * (i) EPA can also wholly or
partly annul the current award for the
grantee's or subgrantee's program.
(e) Add a new § 31.45 to Subpart C to
read as follows:
§31.45 Quality assurance.
If the grantee's project involves
environmentally related measurements
or data generation, the grantee shall
develop and implement quality
assurance practices consisting of
policies, procedures, specifications,
standards, and documentation sufficient
to produce data of quality adequate to
meet project objectives and to minimize
loss of data due to out-of-control
conditions or malfunctions.
f. Add a new 40 CFR Part 31, Subpart
F. consisting of § 31.70 to read as follows:
Subpart F—Disputes
§31.70 Disputes.
(a)	Disagreements should be resolved
at the lowest level possible.
(b)	If an agreement cannot be reached,
the EPA disputes decision official will
provide a written final decision. The
EPA disputes decision official is the
individual designated by the award
official to resolve disputes concerning
assistance agreements.
(c)	The disputes decision official's
decision will constitute final agency
action unless a request for review is
filed by registered mail, return receipt
requested, within 30 calendar days of
the date of the decision.
(1)	For final decisions issued by an
EPA disputes decision official at
Headquarters, the request for review
shall be filed with the Assistant
Administrator responsible for the
assistance program.
(2)	For final decisions issued by a
Regional disputes decision official, the
request for review shall be filed with the
Regional Administrator. If the Regional
Administrator issued the final decision,
the request for reconsideration shall be
filed with the Regional Administrator.
(d)	The request shall include:
(1)	A copy of the EPA disputes
decision official's final decision:
(2)	A statement of the amount in
dispute:
(3)	A description of the issues
involved: and
(4)	A concise statement of the
objections to the final decision.
(e)	The disputant(s) may be
represented by counsel and may submit
documentary evidence and briefs for
inclusion in a written record.
(f)	Disputants are entitled to an
informal conference with EPA officials.
(g)	Disputants are entitled to a written
decision from the appropriate Regional
or Assistant Administrator.
(h)	A decision by the Assistant
Administrator to confirm the final
decision of a Headquarters disputes
decision official will constitute the final
Agency action.
(i)	A decision by the Regional
Administrator to confirm the Regional
disputes decision official's decision will
constitute the final Agency action.
However, a petition for discretionary
review by the Assistant Administrator
responsible for the assistance program
may be filed within 30 calendar days of
the Regional Administrator s decision.
The petition shall be sent to the
Assistant Administrator by registered
mail, return receipt requested, and shall
include:
(1)	A copy of the Regional
Administrator's decision; and
(2)	A concise statement ^pf the
objections to the decision.
(j) If the Assistant Administrator
decides not to review the Regional
Administrator's decision, the Assistant
Administrator will advise the
disputant(s) in writing that the Regional
Administrator's decision remains the
final Agency action.
(k) If the Assistant Administrator
decides to review the Regional
Administrator's decision, the review will
generally be limited to the written
record on which the Regional
Administrator's decision was based.
The Assistant Administrator may allow
the disputant(s) to submit bnefs in
support of the petition for review and
may provide an opportunity for an
informal conference in order to clarify
technical or legal issues. After reviewir-
the Regional Administrator's decisior
the Assistant Administrator will issut
written decision which will then becon.
the final Agency action.
(1) Reviews may not be requested of:
(1)	Decisions on requests for
exceptions under $ 31.6;
(2)	Bid protest decisions under
S 31.36(b)(12);
(3)	National Environmental Policy Act
decisions under Part 6;
(4)	Advanced wastewater treatment
decisions of the Administrator and
(5)	Policy decisions of the EPA Audit
Resolution Board.
PART 30—GENERAL REGULATION
FOR ASSISTANCE PROGRAMS FOR
OTHER THAN STATE AND LOCAL
GOVERNMENTS
3.	Amend Part 30 by revising the title
to read as set forth above; the authority
citation continues to read as follows:
Authority: 33 U.S.C 1251 et aeq^ 42 U.S.C
7401 et seq.; 42 U.S.C 6901 et seq.; 42 U.S.C
300f et seq.: 7 U.S.C 136 et seq.; 15 U.S.C
2601 et seq.; 42 U.S.C 9601 et seq.
4.	Further amend Part 30 as follows:
§30^02 [Amended]
a.	Amend § 30.302 by removing
paragraphs (d) (2) and (3).
§30301 [Amended]
b.	Amend § 30.501 by removing
paragraph (a)(2) and redesignating (a)(3)
as (a)(2).
§ 30.503 [Amended ]
c.	Amend § 30.503 by removing
paragraphs (e). (g) and (h) and
redesignating (f) as (e).
§30.505 [Amended]
d.	Amend § 30.505 by removing
paragraph (b)(2) and redesignating (b)(3)
as (b)(2).
§30.540 [Amended]
e.	Amend § 30.540 by removing
paragraph (b) and redesignating fc) as
(b).
Appendix E—Redesignated as Appendix
A to Part 31
f.	Appendix E is redesignated as
Appendix A to Part 31.
PART 33—PROCUREMENT UNDER
ASSISTANCE AGREEMENTS
5.	Amend Part 33 as follows-
a. The authority citation for Part 33
continues to read as follows:
-------
Authority: 7 U.S.C. 135 et seq.: IS U.S.C
2601 et seq.: 33 U.S.C. 1251 et seq.: 42 U.S.C
241. 242b. 243. 246. 300j-l- 300j-2. 300j-3.1857
et seq.. 6901 et seq.: and 42 U.S.C 9601 et seq.
§33.110 [Amended]
b.	Amend § 33.110 by removing
paragraph (e)(5) and redesignating (e)(6)
as (e)(5).
$33,210 [Amended]
c.	Amend § 33.210 by removing
paragraph (f) and redesignating (g) and
(h) as (f) and (g) respectively.
Subparts C and E—[Removed and
Reserved]
d.	Subparts C and E are removed and
reserved.
$ 33.1021 [Removed and Reserved]
e.	$ 33.1021 is removed and reserved.
§33.1030 [Amended]
L Amend § 33.1030 by removing
clauses 3. 4. 8. and 12 and redesignating
5 as 3, 6 as 4, 7 as 5. 9 as 6.10 as 7.11 as
8.13 9s 9. and 14 as 10.
BILLING COOE BMO-SO-M
-------
Text of the Common Rule
The text of the common rule as
adopted by the agencies in this
document appears below.
PART	—UNIFORM
ADMINISTRATIVE REQUIREMENTS
FOR GRANTS AND COOPERATIVE
AGREEMENTS TO STATE AND LOCAL
GOVERNMENTS
Subpart A—General
Sec.
1
Purpose and scope of this part.
7
Scope of subpart.
*
Definitions.
	4
Applicability.
	5
Effect on other issuances.
	6
Additions and exceptions.
Subpart B—Prw-Award Requirements
	10 Forms for applying for grants.
	11 Slate plans.
	12 Special grant or subgrant conditions
for "high-risk" grantees.
Subpart C—Post-Award Requirements
Financial Administration
	20 Standards for financial management
systems.
	21 Payment
	22 Allowable costs.
	23 Period of availability of funds.
	24 Matching or cost sharing.
	25 Program income.
	26 Non-Federal audit.
Changes, Property, and Subawards
	30	Changes.
	31	Real property.
___32	Equipment.
	33	Supplies.
	34	Copynghts.
	35	Subawards to debarred and
suspended parties.
	36	Procurement.
	37	Subgrants.
Reports. Records, Rotention. and
Enforcement
	40 Monitoring and reporting program
performance.
	41 Financial reporting.
	42 Retention and access requirements
for records.
	43 Enforcement.
	44 Termination for convenience.
Subpart D—After-the-Grant Requirements
	50 Closeout.
	51 Later disallowances and
adjustments.
	52. Collection of amounts due.
-------
8088
Federal Register / Vol. 53. No. 48 / Friday. March 11, 1988 / Rules and Regulations
Subpart E—Entitlements (Reserved)
Subpart A—General
§	.1 Purpose and acope of tNa pert
This part establishes uniform
administrative rules for Federal grants
and cooperative agreements and
subawards to State, local and Indian
tribal governments.
§	3. Scope of subpart
This subpart contains general rules
pertaining to this part and procedure*
for control of exceptions from this part
§	J Definitions.
As used in this part:
"Accrued expenditures'* mean the
charges incurred by the grantee during a
given period requiring the provision of
funds for (1) Goods and other tangible
property received: (2) services
performed by employees, contractors,
subgrantees. subcontractors, and other
payees; and (3) other amounts becoming
owed under programs fbrwhich no
current services or performance iff
required, such as annuities, insurance
claims, and other benefit payments.
"Accrued income" means the sum of:
(1) Earnings during a given period from
services performed by the grantee and
goods and other tangible property
delivered to purchasers, and f2) amounts
becoming owed to the grantee for which
no current services or performance ia
required by the grantee.
"Acquisition cost" of an. item of
purchased equipment means the net
invoice unit price of the property
including the cost of modifications,
attachments, accessories, or auxiliary
apparatus necessary to make the
property usable for the purpose for
which it was acquired. Other charges
such as the cost of installation,
transportation, taxes, duty or protective
in-transit insurance, shall be included or
excluded from the unit acquisition cost
in accordance with the grantee's regular
accounting practices.
"Administrative" requirements mean
those matters common to grants in
general, such as financial management
kinds and frequency of reports, and
retention of records. These are
distinguished from "programmatic"
requirements, which concern matters
' that can be treated only on a program-
by-program or grant-by-grant basis, such
as kinds of activities that can be
supported by grants under a particular
program.
"Awarding agency" means (1) with
respect to a grant the Federal agency,
and (2) with respect to a subgrant the
party that awarded the subgrant
"Cash contributions" means the
grantee's cash outlay, including the
outlay of money contributed to the
grantee or subgrantee by other public,
agencies and institutions, and private
organizations and individuals. When
authorized by Federal legislation.
Federal funds received from other
assistance agreements may be
considered as grantee or subgrantee
cash contributions.
"Contract" means (except as used in
the definitions for "grant" and
"subgrant" in this section and except
where qualified by "Federal") a
procurement contract under a grant or
subgrant and means a procurement
subcontract under a contract
"Cost sharing or matching" means the
value of the third party in-kind
contributions and the portion of the
costs of a federally assisted protect or
program not borne by the Federal
Government
"Cost-type contract" means, a contract
or subcontract under a grant in which
the contractor or subcontractor is paid
on the basis of the costs it incurs, with,
or without a fee.
"Equipment" means tangible,
nonexpendable, personal property
having a useful life of more than one
yeaT and an acquisition cost of SSiXK) or
more per unit A grantee may use its
own definition of equipment provided
that such definition would at least
include all equipment defined above.
"Expenditure report" means: flj For
nonconstruction grants, the SF-269
"Financial Status Report" (or other
equivalent report); (2) for construction
grants, the SF-271 "Outlay Report and
Request for Reimbursement" (or other
equivalent report).
"Federally recognized Indian tribal
government" means the governing body
or a governmental agency of any Indian"'
tribe, band, nation, or other organized
group or community (including any
Native village as defined in section 3 of
the Alaska Native Claims Settlement
Act B5 Stat 668) certified by the
Secretary of the Interior as eligible for
the special programs and services
provided by him through the Bureau of
Indian Affairs.
"Government" means a State or local
government or a federally recognized
Indian tribal government.
"Grant" means an award of financial
assistance, including cooperative
agreements, in the form of money, or
property in lieu of money, by the Federal
Government to an eligible grantee. The
term does not include technical
assistance which provides services
instead of money, or other assistance in
the form of revenue sharing, loans, loan
guarantees, interest subsidies,
insurance, or direct appropriations.
Also, the term does not include
assistance, such as a fellowship or other
lump sum award, which the grantee is
not required to account for.
"Grantee" means the government ta
which a grant is awarded and which is
accountable for the use of the funds
provided. The grantee is the entire legal
entity even if only a particular
component of the entity is designated in
the grant award document
"Local government" means a county,
municipality, city. town, township, local
public authority (including any public
and Indian housing agency under the
United States Housing Act of 1337)
school district special district intrastate
district council of governments
(whether or not incorporated as a
nonprofit corporation under state La.w)»
any other regional or interstate
government entity, or any agency or
instrumentality of a local govemmenL
"Obligations" means the amounts of
orders placed, contracts and subgrants
awarded, goods and services received,
and similar transactions during a given
period that will require payment by the
grantee during the same or a future
period.
"OMB" means the United States
Office of Management and Budget
"Outlays" (expenditures) mean
charges made to the project or program.
They may be reported on a cash or
accrual basis. For reports prepared on a
cash basis, outlays are the sum of actual
cash disbursement for direct charges for
goods and services, the amount of
indirect expense incurred the value of
in-kind contributions applied, and the
amount of cash advances and payments
made to contractors and subgrantees.
"For reports prepared on an accrued
expenditure basis, outlays are the sum
of actual cash disbursements, the
amount of indirect expense incurred the
value of inkind contributions applied,
and the new increase (or decrease) in
the amounts owed by the grantee for
goods and other property received, for
services performed by employees,
contractors, subgrantees.
subcontractors, and other payees, and
other amounts becoming owed under
programs for which no current services
or performance are required, such as
annuities, insurance claims, and other
benefit payments.
"Percentage of completion method"
refers to a system under which
payments are made for construction
work according to the percentage of
completion of the work, rather than to
the grantee's cost incurred.
"Prior approval" means
documentation evidencing consent prior
to incurring specific cost
-------
Federal Register / Vol. 53. No. 48 / Friday. March 11. 1988 / Rules and Regulations	8089
"Real property" means land, including
land improvements, structures and
appurtenances thereto, excluding
movable machinery and equipment.
"Share", when referring to the
awarding agency's portion of real
property, equipment or supplies, means
the same percentage as the awarding
agency's portion of the acquiring party's
total costs under the grant to which the
acquisition costs under the grant to
which the acquisition cost of the
property was charged. Only costs are to
be counted—not the value of third-party
in-kind contributions.
"State" means any of the several
States of the United States, the District
of Columbia, the Commonwealth of
Puerto Rico, any territory or possession
of the United States, or any agency or
instrumentality of a State exclusive of
local governments. The term does not
include any public and Indian housing
agency under United States Housing Act
of 1937.
"Subgrant" means an award of
financial assistance in the form of
money, or property in lieu of money,
made under a grant by a grantee to an
eligible subgrantee. The term includes
financial assistance when provided by
contractual legal agreement, but does
nut include procurement purchases, nor
does it include any form of assistance
which is excluded from the definition of
"grant" in this part.
"Subgrantee" means the government
or other legal entity to which a subgrant
is awarded and which is accountable to
the grantee for the use of the funds
provided.
"Supplies" means all tangible
personal property other than
"equipment" as defined in this part.
"Suspension" means depending on the
context, either (1) temporary withdrawal
of the authority to obligate grant funds
pending corrective action by the grantee
or subgrantee or a decision to terminate
the grant, or (2) an action taken by a
suspending official in accordance with
agency regulations implementing E.O.
12549 to immediately exclude a person
from participating in gTant transactions
for a period, pending completion of an
investigation and such legal or
debarment proceedings as may ensue.
'Termination'' means permanent
withdrawal of the authority to obligate
previously-awarded grant funds before
that authority would otherwise expire. It
also means the voluntary relinquishment
of that authority by the grantee or
subgrantee. 'Termination" does not
include: (1) Withdrawal of funds
awarded on the basis of the grantee's
underestimate of the unobligated
balance in a prior period: (2)
Withdrawal of the unobligated balance
as of the expiration of a grant: (3)
Refusal to extend a grant or award
additional funds, to make a competing
or noncompeting continuation, renewal,
extension, or supplemental award; or (4)
voiding of a grant upon determination
that the award was obtained
fraudulently, or was otherwise illegal or
invalid from inception.
"Tenns of a grant or subgrant" mean
all requirements of the grant or
subgrant. whether in statute,
regulations, or the award document
"Third party in-kind contributions"
mean property or services which benefit
a federally assisted project or program
and which are contributed by non-
Federal third parties without charge to
the grantee, or a cost-type contractor
under the grant agreement.
"Unliquidated obligations" for reports
prepared on a cash basis mean the
amount of obligations incurred by the
grantee that has not been paid. For
reports prepared on an accrued
expenditure basis, they represent the
amount of obligations incurred by the
grantee for which an outlay has not
been recorded.
"Unobligated balance" means the
portion of the funds authorized by the
Federal agency that has not been
obligated by the grantee and is
determined by deducting the cumulative
obligations from the cumulative funds
authorized.
§	4 Applicability.
(a) General. Subparts A-D of this part
apply to all grants and subgrants to
governments, except where inconsistent
with Federal statutes or with regulations
authorized in accordance with the
exception provision of 5	8. on
(1)	Grants and subgrants to State and
local institutions of higher education or
State and local hospitals.
(2)	The block grants authorized by the
Omnibus Budget Reconciliation Act of
1981 (Community Services; Preventive
Health and Health Services; Alcohol,
Drug Abuse, and Mental Health
Services; Maternal and Child Health
Services: Social Services: Low-Income
Home Energy Assistance; States'
Program of Community Development
Block Grants for Small Cities: and
Elementary and Secondary Education
other than programs administered by the
Secretary of Education under Title V,
Subtitle D, Chapter 2, Section 583—the
Secretary's discretionary grant program)
and Titles I—III of the Job Training
Partnership Act of 1982 and under the
Public Health Services Act {Section
1921). Alcohol and Drug Abuse
Treatment and Rehabilitation Block
Grant and Part C of Title V, Mental
Health Serv ice for the Homeless Block
Grant).
(3)	Entitlement grants to carry out the
following programs of the Social
Security Act:
(i)	Aid to Needy Families with
Dependent Children (Title IV-A of the
Act. not including the Work Incentive
Program (WIN) authorized by section
402(a)19(G); HHS grants for WIN are
subject to this part);
(ii)	Child Support Enforcement and
Establishment of Paternity (Title IV-D of
the Act);
(iii)	Foster Care and Adoption
Assistance (Title IV-E of the Act):
(iv)	Aid to the Aged. Blind.'and
Disabled (Titles I. X, XIV. and XVI-
AABD of the Act); and
(v)	Medical Assistance (Medicaid)
(Tide XIX of the Act) not including the
State Medicaid Fraud Control program
authorized by section 1903(a)(8)(B).
(4)	Entitlement grants under the
following programs of The National
School Lunch Act:
(i)	School Lunch (section 4 of the Act).
(ii)	Commodity Assistance (section 8
of the Act],
(iii)	Special Meal Assistance (section
11 of the Act).
(iv)	Summer Food Service for Children
(section 13 of the Act), and
(v)	Child Care Food Program (section
17 of the Act).
(5)	Entitlement grants under the
following programs of The Child
Nutrition Act of 1968;
(i)	Special Milk (section 3 of the Act),
and
(ii)	School Breakfast (section 4 of the
Act).
(6)	Entitlement grants for State
Administrative expenses under The
Food Stamp Act of 1977 (section 16 of
the Act).
(7)	A grant for an experimental, pilot,
or demonstration project that is also
supported by a grant listed in paragraph
(a)(3) of this section:
(8)	Grant funds awarded under
subsection 412(e) of the Immigration and
Nationality Act (8 U.S.C. 1522(e)) and
subsection 501(a) of the Refugee
Education Assistance Act of 1980 (Pub.
L 96-422. 94 Stat 1809), for cash
assistance, medical assistance, and
supplemental security income benefits
to refugees and entrants and the
administrative costs of providing the
assistance and benefits;
(9)	Grants to local education agencies
under 20 U.S.C. 236 through 241-l(a).
and 242 through 244 (portions of the
Impact Aid program), except for 20
U.S.C. 238(d)(2)(c) and 240(f)
(Entitlement Increase for Handicapped
Children): and
-------
8090
Federal Register / Vol. 53, No. 48 / Friday, March Tl. 1988 / Rules and- Regulations
(10) Payments under the Veterans
Administration's State Home Per Diem
""ogram (38 U.SjC. 641(a)).
b) Entitlement programs. Entitlement
grams enumerated above in
		4(a) (3M8) are subject to Subpart
E
§	& Effect on other Issuances.
All other grants administration
provisions of codified program,
regulations, program manuals,
handbooks and other nonregulatoiy
materials which are inconsistent with
this part are superseded, except to the
extent they are required by statute, or
authorized in accordance with the
exception provision in 5	6.
§	6 Additions and exceptions
(a)	For classes of grants and grantees
subject to this part, Federal agencies
may not impose additional
administrative requirements except in
codified regulations published in th*
Federal Register.
(b)	Exceptions for classes of grants or
grantees may be authorized only by
OMB.
(c)	Exceptions on a case-by-case basis
and for subgrantees may be authorized
by the affected Federal agencies.
Subpart B—Pre-Award Requirements
' 	10 Forms for applying tor grants.
\) Scope. (1) This section prescribes
ns and instructions ts be used by
0..vemmental organizations (except
hospitals and institutions of higher
education operated by a government) in
applying for grants. This section is not
applicable, however, to formula grant
programs which do not require
applicants to apply for funids on a
project basis.
(2) This section applies only to
applications to Federal agencies for
grants, and is not required to be applied
by grantees in dealing with applicants
for subgrants. However, grantees are
encouraged to avoid more detailed or
burdensome application requirements
for subgrants.
(b) Authorized foms end instrucuoas
for governmental organizations. (1) in
applying for grants, applicants shall only
use standard application forms or those
prescribed by the granting agency with
the approval of OMB under the
Paperwork Reduction Act of 1980.
(2)	Applicants are not required to
submit more than the original and two
copies of preapplications or
applications.
(3)	Applicants must follow all
applicable instructions that bear OMB
' "Tance numbers. Federal agencies
specify and describe the programs,
ions, or activities that will be used
to plan, budget, and evaluate the work
under a grant. Other supplementary
instructions may be issued only with the
approval of OMB to the extent required
under the Paperwork. Reduction Act el
198a For any standard form, except the
SF-424 facesheet Federal agencies may
shade out or instruct the applicant to
disregard any line item that is not
needed.
(4) When a grantee applies, foe
additional funding (such as a
continuation or supplemental award) or
amends a previously submitted
application, only the affected pages
need be submitted. Previously submitted
pages with information that is still
current need not be resubmitted.
{	11 State plans.
(a) Scope. The statutes for some
programs require States to submit plans
before receiving grants. Under
regulations implementing Executive
Order 12372, "Intergovernmental Review
of Federal Programs." States are
allowed to simplify, consolidate and
substitute plans. This section ountains
additional previsions for plans that are
subject to regulations implementing the
Executive Order.
(b} Requirements. A State need meet
only Federal administrative or
programmatic requirements fbra plan
that are in statutes or codified
regulations.
(c)	Assurances. In each plan the State
will include an assurance thai the State
shall comply with all applicable Federal
statutes and regulations in effect with
respect to the periods for which it
receives grant funding. For this
assurance and other assurances '
Tequired in the plan, the State may:
(1)	Cite by number the statutory or
regulatory provisions requiring the
assurances and affirm that it gives the
assurances required by those provisions,
(2)	Repeat the assurance language in
the statutes or regulations, or
(3)	Develop its own language to the
extent permitted by law.
(d)	Amendments. A State will amend
a plan whenever necessary to reflect ft)
New or revised Federal statutes or
regulations or (2) a material change in
any State law. organization, policy, or
State agency operation. The State will
obtain approval for the amendment and
its effective date but need submit for
approval only the amended portions of
the plan.
§	12 Special grant or subgrant
conditions tor "high-risk" grantees.
(a) A grantee orsubgrantee may be
considered "high risk" if an awarding
agency determines that a grantee or
subgrantee:
(1)	Has a history of unsalisiactory
performance, or
(2)	Is not financially stable, or
(3)	Has a management system which
does not meet the management
standards set forth m this part.or
(4)	Has not conformed to terms and
conditions of previous awards, or
(5)	Is otherwise not responsible: and if
the awarding agency determines that as
award will be made, special conditions
and/or restrictions shaft correspond to
the high risk condition and shall be
included m the award.
(b)	Special conditions or restrictions
may include:
(1)	Payment on a reimbursement
basis;
(2)	Withholding authority to proceed
to the next phase until receipt of
evidence of acceptable performance
within a given funding period;
(3)	Requiring additional, more detailed
financial reports;
(4)	Additional project monitoring,
(5)	Requiring the graote or subgrantee
to obtain technical or management
assistance; or
(6)	Establishing additional prior
approvals.
(c)	If as awarding agency decides to
impose such conditions, the awarding,
official will notify the grantee or
subgrantee as early as possible; in
writing, of:
(1)	The nature of the special,
conditions/restrictions;
(2)	The reasonfs) for imposing themr
(3)	The corrective actions which must
be taken before they will be removed
and the time a Rowed for completing the
corrective actions and
(4)	The method of requesting
reconsideration of the conditions/"
restrictions imposed.
Subpart C—Post-Award Requirements
Financial Administration
§	20 Standards for financial
management systems.
(a) A State must expand and account
for grant funds in accordance with State
laws and procedures for expending and
accounting for its own funds. Fiscal
control and accounting procedures of
the State, as well as its subgrantees and
cost-type contractors, must be sufficient
to—
(1)	Permit preparation of reports
required by this part and the statutes
authorizing the grant, and
(2)	Permit the tracing of funds to a
level of expenditures adequate to
establish that such funds have not been
used in violation of the restrictions and
prohibitions of applicable statutes.
-------
Federal Register / Vol. 53. No. 48 / Friday. March 11. 1938 / Rules and Regulations
8091
(b) The financial management systems
of other grantees and subgrantees must
meet the following standards:
(1)	Financial leportmg. Accurate,
current, and complete disclosure of the
financial results of financially assisted
activities must be made in accordance
with the financial reporting
requirements of the grant or subgrar.t.
(2)	Accounting records. Grantees and
subgrantees must rr.aintain records
which adequately identify the source
and application of funds provided for
financially-assisted activities. These
records must contain information
pertaining to grant or subgrant awards
and authorizations, obligations,
unobligated balances, assets, liabilities,
outlays or expenditures, and income.
(3)	Internal control. Effective control
and accountability must be maintained
for all grant and subgrant cash, real and
personal property, and other assets.
Grantees and subgrantees must
adequately safeguard all such property
and must assure that it is used solely for
authorized purposes.
(4)	Budget control. Actual
expenditures or outlays must be
compared with budgeted amounts for
each grant or subgrant. Financial
information must be related to
performance or productivity data,
including the development of unit cost
information whenever appropriate or
specifically required in the grant or
subgrant agreement. If unit cost data are
required, estimates based on available
documentation will be accepted
whenever possible.
(5)	Allowable cost. Applicable OMB
cost principles, agency program
regulations, and the terms of grant and
subgrant agreements will be followed in
determining the reasonableness,
allowability, and allocability of costs.
(6)	Source documentation. Accounting
records must be supported by such
source documentation as cancelled
checks, paid bills, payrolls, time and
attendance records, contract and
subgrant award documents, etc.
(7)	Cash management Procedures for
minimizing the time elapsing between
the transfer of funds from the U.S.
Treasury and disbursement by grantees
and subgrantees must be followed
whenever advance payment procedures
are used. Grantees must establish
reasonable procedures to ensure the
receipt of reports on subgrantees' cash
balances and cash disbursements in
sufficient time to enable them to prepare
complete and accurate cash transactions
reports to the awarding agency. When
advances are made by letter-of-credit or
electronic transfer of funds methods, the
grantee must make drawdowns as close
as possible to the time of making
disbursements. Grant ;cs must monitor
cash drawdowns by their subgrantees to
assure that they conform substantially
to the same standards of timing and
amount as apply to advances to the
grantees.
(c) An awarding agency may review
the adequacy of the financial
management system of any applicant for
financial assistance as part of a
preaward review or at any time
subsequent to award.
§	21 Payment
(a)	Scope. This section prescribes the
basic standard and the methods under
which a Federal agency will make
payments to grantees, and grantees will
make payments to subgrantees and
contractors.
(b)	Basic standard. Methods and
procedures for payment shall minimize
the time elapsing between the transfer
of funds and disbursement by the
grantee or subgrantee. in accordance
with Treasury regulations at 31 CFR Part
205.
(c)	Advances. Grantees and
subgrantees shall be paid in advance,
provided they maintain or demonstrate
the willingness and ability to maintain
procedures to minimize the time
elapsing between the transfer of the
funds and their disbursement by the
grantee or subgrantee.
(d)	Reimbursement. Reimbursement
shall be the preferred method when the
requirements in paragraph (c) of this
section are not met. Grantees and
subgrantees may also be paid by
reimbursement for any construction
grant. Except as otherwise specified in
regulation, Federal agencies shall not
use the percentage of completion
method to pay construction grants. The
grantee or subgrantee may use that
method to pay its construction
contractor, and if it does, the awarding
agency's payments to the grantee or
subgrantee will be based on the
grantee's or subgrantee'? actual rate of
disbursement.
(e)	Working capitaI advances. If a
grantee cannot meet the criteria for
advance payments described in
paragraph (c) of this section, and the
Federal agency has determined that
reimbursement is not feasible because
the grantee lacks sufficient working
capital, the awarding agency may
provide cash or a working capital
advance basis. Under this procedure the
awarding agency shall advance cash to
the grantee to cover its estimated
disbursement needs for an initial period
generally geared to the grantee's
disbursing cycle. Thereafter, the
awarding agency shall reimburse the
grantee for its actual cash
disbursements. The working capital
advance method of payment shall not be
used by grantees or subgrantees if the
reason for using such method is the
unwillingness or inability of the grantee
to provide timely advances to the
subgrantee to meet the subgrantee's
actual cash disbursements.
(f)	Effect of program income, refunds,
and audit recoveries on payment. (1)
Grantees and subgrantees shall disburse
repayments to and interest earned on a
revolving fund before requesting
additional cash payments for the same
activity.
(2) Except as provided in paragraph
(f)(1) of this section, grantees and
subgrantees shall disburse program
income, rebates, refunds, contract
settlements, audit recoveries and
interest earned on such funds before
requesting additional cash payments.
(g)	Withholding payments. (1) Unless
otherwise required by Federal statute,
awarding agencies shall not withhold
payments for proper charges incurred by
grantees or subgrantees unless—
(1)	The grantee or subgrantee has
failed to comply with grant award
conditions or
(ii) The grantee or subgrantee is
indebted to the United States.
(2)	Cash withheld for failure to comply
with grant award condition, but without
suspension of the grant, shall be
released to the grantee upon subsequent
compliance. When a grant is suspended,
payment adjustments will be made in
accordance with §	43(c).
(3)	A Federal agency shall not make
payment to grantees for amounts that
are withheld by grantees or subgrantees
from payment to contractors to assure
satisfactory completion of work.
Payments shall be made by the Federal
agency when the grantees or
subgrantees actually disburse the
withheld funds to the contractors or to
escrow accounts established to assure
satisfactory completion of work.
(h)	Cash depositories. (1) Consistent
with the national goal of expanding the
opportunities for minority business
enterprises, grantees and subgrantees
are encouraged to use minority banks (a
bank which is owned at least 50 percent
by minority group members). A list of
minority owned banks can be obtained
from the Minority Business Development
Agency, Department of Commerce.
Washington. DC 20Z30.
(2) A grantee or subgrantee shall
maintain a separate bank account only
when required by Federal-State
agreement.
(i)	Interest earned on advances.
Except for interest earned on advances
of funds exempt under the
-------
8092
Federal Register / Vol. 53, No. 48 / Friday. March 11. 1988 I Rules and Regulations
Intergovernmental Cooperation Act (31
U.S.C. 6501 et seq.) and the Indian Self-
Determination Act (23 U.S.C. 450).
grantees and subgrantees shall
promptly, but at least quarterly, remit
interest earned on advances to the
Federal agency. The grantee or
subgrantee may keep interest amounts
up to SlOO per year for administrative
expenses.
§	22 Allowable cost*.
(a)	Limitation on use of funds. Grant
funds may be used only for
(1)	The allowable costs of the
grantees, subgrantees and cost-type
contractors, including allowable costs in
the form of payments to Fixed-price
contractors: and
(2)	Reasonable fees or profit to cost-
type contractors but not any fee or profit
(or other increment above allowable
costs] to the grantee or subgrantee.
(b)	Applicable cost principles. For
each kind of organization, there is a set
of Federal principles for determining
allowable costs. Allowable costs will be
determined in accordance with the cost
principles applicable to the organization
incurring the costs. The following chart
lists the kinds of organizations and the
applicable cost principles.
For if* costs Ol I
Stale, local or Indan
moat government
Private nonprofit
organization otner than
an (11 institution o>
fuaher education. (2)
hospital, or (3)
organization named tfi
OMB Circular A-122
as not subject lo mat
circular
Eoucaoonal institutions	
For-profit organcation
otner tr-.an a hospital
ana an organization
named in OSM
Circular A-122 as not
subject to thai circular.
Use the principles «»—
OMB Ocular A-87
OSM Ocular A-122
OMB Ocular A-21.
48 CFR Part 31.
Contract Cost
Pnnaptes and
Procedures, or uniform
cost accounting
standards that comply
wrrn cost principles
acceptable to the
Federal agency
-23 Period fo availability of funds.
§.
(a)	General. Where a funding period is
specified, a grantee may charge to the
award only costs resulting from
obligations of the funding period unless
carryover of unobligated balances is
permitted, in which case the carryover
balances may be charged for costs
resulting from obligations of the
subsequent funding period.
(b)	Liquidation of obligations. A
grantee must liquidate all obligations
incurred under the award not later than
90 days after the end of the funding
period (or as specified in a program
regulation) to coincide with the
submission of the annual Financial
Status Report (SF-269). The Federal
agency may extend this deadline at the
request of the grantee.
5	24 Matching or cost sharing.
(a)	Basic rule: Costs and contributions
acceptable. With the qualifications and
exceptions listed in paragraph (b) of this
section, a matching or cost sharing
requirement may be satisfied by either
or both of the following:
(1)	Allowable costs incurred by the
grantee, subgrantee or a cost-type
contractor under the assistance
agreement. This includes allowable
costs bome by non-Federal grants or by
others cash donations from non-Federal
third patties.
(2)	The value of third party in-kind
contributions applicable to the period to
which the cost sharing or matching
requirements applies.
(b)	Qualifications and exceptions—(1)
Costs borne by other Federal grant
agreements. Except as provided by
Federal statute, a cost sharing or
matching requirement may not be met
by costs borne by another Federal grant
This prohibition does not apply to
income earned by a grantee or
Bubgrantee from a contract awarded
under another Federal grant
(2)	General revenue sharing. For the
purpose of this section, general revenue
sharing funds distributed under 31
U.S C. 6702 are not considered Federal
grant funds.
(3)	Cost or contributions counted
towards other Federal costs-sharing
requirements. Neither costs nor the
values of third party in-kind
contributions may count towards
satisfying a cost sharing or matching
requirement of a grant agreement if they
have been or will be counted towards
satisfying a cost sharing or matching
requirement of another Federal grant
agreement, a Federal procurement
contract, or any other award of Federal
funds.
(4)	Costs financed by program income.
Costs financed by program income, as
defined in 5	25. shall not count
towards satisfying a cost sharing or
matching requirement unless they are
expressly permitted in the terms of the
assistance agreement. (This use of
general program income is described in
5	25(g).)
(5)	Services or property financed by
income earned by contractors.
Contractors under a grant may earn
income from the activities carried out
under the contract in addition to the
amounts earned from the party
awarding the contract. No costs of
services or property supported by this
income may count toward satisfying a
cost sharing or matching requirement
unless other provisions of the grant
agreement expressly permit this kind of
income to be used to meet the
requirement.
(6)	Records. Costs and third party in-
kind contributions counting towards
satisfying a cost sharing or matching
requirement must be verifiable from the
records of grantees and subgrantee or
cost-type contractors. These records
must show how the value placed on
third party in-kind contributions was
derived. To the extent feasible,
volunteer services will be supported by
the same methods that the organization
uses to support the allocability of
regular personnel costs.
(7)	Special standards for third party
in-kind contributions, (i) Third party in-
kind contributions count towards
satisfying a cost sharing or matching
requirement only where, if the party
receiving the contributions were to pay
for them, the payments would be
allowable costs.
(ii)	Some third party in-kind
contributions are goods and services
that if the grantee, subgrantee. or
contractor receiving the contribution
had to pay for them, the payments
would have been an indirect costs.
Costs sharing or matching credit for
such contributions shall be given only if
the grantee, subgrantee. or contractor
has established, along with its regular
indirect cost rate, a special rate for
allocating to individual projects or
programs the value of the contributions.
(iii)	A third party in-kind contribution
to a fixed-price contract may count
towards satisfying a cost sharing or
matching requirement only if it results
in:
(A)	An increase in the services or
properly provided under the contract
(without additional cost to the grantee
or subgrantee) or
(B)	A cost savings to the grantee or
subgrantee.
(iv)	The values placed on third party
in-kind contributions for cost sharing or
matching purposes will conform to the
rules in the succeeding sections of this
part. If a third party in-kind contribution
is a type not treated in those sections,
the value placed upon it shall be fair
and reasonable.
(c) Valuation of donated services—(1)
Volunteer services. Unpaid services
provided to a grantee or subgrantee by
individuals will be valued at rates
consistent with those ordinarily paid for
similar work in the grantee's or
subgrantee's organization. If the grantee
-------
Federal Register / Vol. 53. No. 48 / Friday, Murch 11. 1988 / Rules and Regulations
8093
or subgrantee does not have employees
performing similar work, the rates will
be consistent with those ordinarily paid
by other employers for similar work in
the same labor market. In either case, a
reasonable amount for fringe benefits
may be included in the valuation.
(2) Employees of other organizations.
When an employer other than a grantee,
subgrantee. or cost-type contractor
furnishes free of charge the services of
an employee in the employee's normal
line of work, the services will be valued
at the employee's regular rate of pay
exclusive of the employee's fringe
benefits and overhead costs. If the
services are in a different line of work,
paragraph (c)(1) of this section applies.
(d)	Valuation of third party donated
supplies and loaned equipment or space.
(1) If a third party donates supplies, the
contribution will be valued at the
market value of the supplies at the time
of donation.
(2) If a third party donates the use of
equipment or space in a building but
retains title, the contribution will be
valued at the fair rental rate of the
equipment or space.
(e)	Valuation of third party donated
equipment, buildings, and land. If a third
party donates equipment, buildings, or
land, and title passes to a grantee or
subgrantee. the treatment of the donated
property will depend upon the purpose
of the grant or subgrant. as follows:
(1)	Awards for capital expenditures. If
the purpose of the grant or subgrant is to
assist the grantee or subgrantee in the
acquisition of property, the market value
of that property at the time of donation
may be counted as cost sharing or
matching.
(2)	Other awards. If assisting in the
acquisition of property is not the
purpose of the grant or subgrant
paragraphs (e)(2) (i) and (ii) of this
section apply:
(i)	If approval is obtained from the
awarding agency, the market value at
the time of donation of the donated
equipment or buildings and the fair
rental rate of the donated land may be
counted as cost shanng or matching. In
the case of a subgrant. the terms of the
grant agreement may require that the
approval be obtained from the Federal
agency as well as the grantee. In all
cases, the approval may be given only if
a purchase of the equipment or rental of
the land would be approved as an
allowable direct cost. If any part of the
donated property was acquired with
Federal funds, only the non-federal
share of the property may be counted as
cost-sharing or matching.
(ii)	If approval is not obtained under
paragraph (e)(2)(i) of this section, no
amount may be counted for donated
land, and only depreciation or use
allowances may be counted for donated
equipment and buildings. The
depreciation or use allowances for this
property are not treated as third party
in-kind contributions. Instead, they are
treated as costs incurred by the grantee
or subgrantee. They are computed and
allocated (usually as indirect costs) in
accordance with the cost principles
specified in §	22. in the same way as
depreciation or use allowances for
purchased equipment and buildings. The
amount of depreciation or use
allowances for donated equipment and
buildings is based on the property's
market value at the time it was donated.
(f)	Valuation of grantee or subgrantee
donated real property for construction/
acquisition. If a grantee or subgrantee
donates real property for a construction
or facilities acquisition project, the
current market value of that property
may be counted as cost sharing or
matching. If any part of the donated
property was acquired with Federal
funds, only the non-federal share of the
property may be counted as cost sharing
or matching.
(g)	Appraisal of real property. In some
cases under paragraphs (d), (e) and (f) of
this section, it will be necessary to
establish the market value of land or a
building or the fair rental rate of land or
of space in a building. In these cases, the
Federal agency may require the market
value or fair rental value be set by an
independent appraiser, and that the
value or rate be certified by the grantee.
This requirement will also be imposed
by the grantee on subgrantees.
§	25 Program income.
(a)	General. Grantees are encouraged
to earn income to defray program costs.
Program income includes income from
fees for services performed, from the use
or rental of real or personal property
acquired with grant funds, from the sale
of commodities or items fabricated
under a grant agreement, and from
payments of principal and interest on
loans made with grant funds. Except as
otherwise provided in regulations of the
Federal agency, program income does
not include interest on grant funds,
rebates, credits, discounts, refunds, etc.
and interest earned on any of them.
(b)	Definition of program income.
Program income means gross income
received by the grantee or subgrantee
directly generated by a grant supported
activity, or earned only as a result of the
grant agreement during the grant period.
"During the grant period" is the time
between the effective date of the award
and the ending date of the award
reflected in the final financial report.
(c)	Cost of generating program
income. If authorized by Federal
regulations or the grant agreement, costs
incident to the generation of program
income may be deducted from gross
income to determine program income.
(d)	Governmental revenues. Taxes,
special assessments, levies, fines, and
other such revenues raised by a grantee
or subgrantee are not program income
unless the revenues are specifically
identified in the grant agreement or
Federal agency regulations as program
income.
(e)	Royalties. Income from royalties
and license fees for copyrighted
material, patents, and inventions
developed by a grantee or subgrantee is
program income only if the revenues are
specifically identified in the grant
agreement or Federal agency regulations
as program income. (See §	34.)
(f)	Property. Proceeds from the sale of
real property or equipment will be
handled in accordance with the
requirements of 55	31 and	32.
(g)	Use of program income. Program
income shall be deducted from outlays
which may be both Federal and non-
Federal as described below, unless the
Federal agency regulations or the grr
agreement specify another altemati
(or a combination of the alternative:,
specifying alternatives, the Federal
agency may distinguish between income
earned by the grantee and income
earned by subgrantees and between the
sources, kinds, or amounts of income.
When Federal agencies authorize the
alternatives in paragraphs (g) (2) and (3)
of this section, program income in
excess of any limits stipulated shall also
be deducted from outlays.
(1)	Deduction. Ordinarily program
income shall be deducted from total
allowable costs to determine the net
allowable costs. Program income shall
be used for current costs unless the
Federal agency authorizes otherwise.
Program income which the grantee did
not anticipate at the time of the award
shall be used to reduce the Federal
agency and grantee contributions rather
than to increase the funds committed to
the project.
(2)	Addition. When authorized,
program income may be added to the
funds committed to the grant agreement
by the Federal agency and the grantee.
The program income shall be used for
the purposes and under the conditions of
the grant agreement.
(3)	Cost sharing or matching. Wh-
authorized, program income may b
used to meet the cost sharing or
matching requirement of the grant
agreement. The amount of the Federal
grant award remains the same.
-------
8094	Federal Register / Vol. 53. No. 48 / Friday. March 11. 1988 / Rules and Regulations
(h) Income after the award period.
There are no Federal requirements
governing the disposition of program
income earned after the end of the
award period (i.e.. until the ending date
of the final financial report see
paragraph (a) of this section), unless the
terms of the agreement or the Federal
agency regulations provide otherwise.
§—*26 Non-Federal audit
(a)	Basic Rule. Grantees and
subgrantees are responsible for
obtaining audits in accordance with the
Single Audit Act of 1984 (31 U.S.C. 7501-
~) and Federal agency implementing
regulations. The aud'.ts shall be made by
an independent auditor in accordance
with generally accepted government
auditing standards covering financial
and compliance audits.
(b)	Subgrantees. State or local
governments, as those terms are defined
for purposes of the Single Audit Act
that receive Federal financial assistance
and provide $25,000 or more of it in a
fiscal year to a subgrantee shall:
(11 Determine whether State or local
subgrantees have met the audit
requirements of the Act and whether
subgrantees covered by OMB Circular
A-llO. "Uniform Requirements for
Grants and Other Agreements with
Institutions of Higher Education.
Hospitals and Other Nonprofit
Organizations" have met the audit
requirement. Commercial contractors
(private forprofit and private and
governmental organizations) providing
goods and services to State and local
governments are not required to have a
single audit performed. State and local
governments should use their own
procedures to ensure that the contractor
has complied with laws and regulations
affecting the expenditure of Federal
funds:
(2)	Determine whether the subgrantee
spent Federal assistance funds provided
in accordance with applicable laws and
regulations. This may be accomplished
by reviewing an audit of the subgrantee
made ir. accordance with the Act.
Circular A-110, or through other means
(e.g.. program reviews) if the subgrantee
has not had such an audit;
(3)	Ensure that appropriate corrective
action is taken within six months after
receipt of the audit report in instance of
noncompliance with Federal laws and
regulations;
(4)	Consider whether subgrantee
audits necessitate adjustment of the
grantee's own records: and
(5)	Require each subgrar.lec to permit
independent auditors to have access to
the records and financial statements.
(c) Auditor selection. In arranging for
audit services. S	36 shall be
followed.
Changes. Property, and Subawards
{	30 Changes
(a)	General. Grantees and subgrantees
are permitted to rebudget within the
approved direct cost budget to meet
unanticipated requirements and may
make limited program changes to the
approved project. However, unless
waived by the awarding agency, certain
types of post-award changes in budgets
and projects shall require the prior
written approval of the awarding
agency.
(b)	Relation to cost principles. The
applicable cost principles (see 5	22)
contain requirements for prior approval
of certain types of costs. Except where
waived, those requirements apply to all
grants and subgrants even if paragraphs
(c) through (f) of this section do not
(c)	Budget changes, (l)
Nonconstruction projects. Except as
stated in other regulations or an award
document grantees or subgrantees shall
obtain the prior approval of the
awarding agency whenever any of the
following changes is anticipated under a
nonconstruction award:
(1)	Any revision which would result in
the need for additional funding.
(ii) Unless waived by the awarding
agency, cumulative transfers among
direct cost categories, or. if applicable,
among separately budgeted programs,
projects, functions, or activities which
exceed or are .expected to exceed ten
percent of the current total approved
budget, whenever the awarding agency's
share exceeds S100.000.
(in| Transfer of funds allotted for
training allowances (i.e.. from direct
payments to trainees to other expense
categories).
(2)	Construction projects. Grantees
and subgrantees shall obtain prior
written approval for any budget revision
which would result in the need for
additional funds.
(3)	Combined construction and
nonconstruction projects. When a grant
or subgrant provides funding for both
construction and nonconstruction
activities, the grantee or subgrantee
must obtain pnor written approval from
the awarding agency before making any
fund or budget transfer from
nonconstruction to construction or vice
versa.
(d)	Programmatic changes. Grantees
or subgrantees must obtain the prior
approval of the awarding agency
whenever any of the following actions is
anticipated:
(1)	Any revision of the scope or
objectives of the project (regardless or
whether there is an associated budget
revision requiring prior approval).
(2)	Need to extend the period of
availability of funds.
(3)	Changes in key persons in cases
where specified in an application or a
grant award. In research projects, a
change in the project director or
principal investigator shall always
require approval unless waived by the
awarding agency.
(4)	Under nonconstruction projects,
contracting out, subgranting (if
authorized by law) or otherwise
obtaining the services of a third party to
perform activities which are central to
the purposes of the award. This
approval requirement is in addition to
the approval requirements of 8	.30
but does not apply to the procurement of
equipment supplies, and general
support services.
(e)	Additional prior approval
requirements. The awarding agency may
not require prior approval for any
budget revision which is not described
in paragraph (c) of this section.
(f)	Requesting prior approval. (1) A
request for prior approval of any budget
revision will be in the same budget
formal the grantee used in its
application and shall be accompanied
by a narrative justification for the
proposed revision.
(2)	A request for a prior approval
under the applicable Federal cost
principles (see §	22) may be made
by letter.
(3)	A request by a subgrantee for prior
approval will be addressed in writing to
the grantee. The grantee will promptly
review such request and shall approve
or disapprove the request in writing. A
grantee will not approve any budget or
project revision which is inconsistent
ivith the purpose or terms and
conditions of the Federal grant to the
grantee. If the revision, requested by the
subgrantee would result in a change to
the grantee's approved project which
requires Federal prior approval, the
grantee will obtain the Federal agency's
approval before approving the
subgrantee's request.
§	.31 Real property.
(a)	Title. Subject to the obligations
and conditions set forth in this section,
title to real property acquired under a
grant or subgrar.t will vest upon
acquisition in the grantee or subgrantee
respectively.
(b)	Use. Except as otherwise provided
b> Federal statutes, real property will be
used for the originally authorized
purposes as long as needed for that
-------
Federal Register / Vol. 53, No. 48 / Friday. March 11. 1988 / Rules and Regulations
8095
purposes, and the grantee or subgrantee
shall not dispose of or encumber its title
or other interests.
(c) Disposition. When real property is
no longer needed for the originally
authorized purpose, the grantee or
subgrantee will request disposition
instructions from the awarding agency.
The instructions will provide for one of
the following alternatives:
(1)	Retention of title. Retain title after
compensating the awarding agency. The
amount paid to the awarding agency
will be computed by applying the
awarding agency's percentage of
participation in the cost of the original
purchase to the fair market value of the
property. However, in those situations
where a grantee or subgrantee is
disposing of real property acquired with
grant funds and acquiring replacement
real property under the same program,
the net proceeds from the disposition
may be used as an offset to the cost of
the replacement property.
(2)	Sale of property. Sell the property
and compensate the awarding agency.
The amount due to the awarding agency
will be calculated by applying the
awarding agency's percentage of
participation in the cost of the original
purchase to the proceeds of the sale
after deduction of any actual and
reasonable selling and fixing-up
expenses. If the grant is still active, the
net proceeds from sale may be offset
against the original cost of the property.
When a grantee or subgrantee is
directed to sell property, sales
procedures shall be followed that
provide for competition to the extent
practicable and result in the highest
possible return.
(3)	Transfer of title. Transfer title to
tbe awarding agency or to a third-party
designated/approved by the awarding
agency. The grantee or subgrantee shall
be paid an amount calculated by
applying the grantee or subgrantee's
percentage of participation in the
purchase of the real property to the
current fair market value of the
property.
9	.32 Equipment
(a)	Title. Subject to the obligations
and conditions set forth in this section,
title to equipment acquired under a
grant or subgrant will vest upon
acquisition in the grantee or subgrantee
respectively.
(b)	States. A State will use, manage,
and dispose of equipment acquired
under a grant by the State in accordance
with State laws and procedures. Other
grantees and subgrantees will follow
paragraphs (c) through (e) of this
section.
fc) Use. (1) Equipment shall be used
by the grantee or subgrantee in the
program or project for which it was
acquired as long as needed, whether or
not the project or program continues to
be supported by Federal funds. When no
longer needed for the original program
or project, the equipment may be used in
other activities currently or previously
supported by a Federal agency.
(2)	The grantee or subgrantee shall
also make equipment available for use
on other projects or programs currently
or previously supported by the Federal
Government providing such use will not
interfere with the work on the projects
or program for which it was originally
acquired. First preference for other use
shall be given to other programs or
projects supported by the awarding
agency. User fees should be considered
if appropriate.
(3)	Notwithstanding the
encouragement in §	25(a) to earn
program income, the grantee or
subgrantee must not use equipment
acquired with grant funds to provide
services for a fee to compete unfairly
with private companies that provide
equivalent services, unless specifically
permitted or contemplated by Federal
statute.
(4)	When acquiring replacement
equipment the grantee or subgrantee
may use the equipment to be replaced as
a trade-in or sell the property and use
the proceeds to offset the cost of the
replacement property, subject to the
approval of the awarding agency.
(d) Management requirements.
Procedures for managing equipment
(including replacement equipment),
whether acquired in whole or in part
with grant funds, until disposition takes
place will, as a minimum, meet the
following requirements:
(1)	Property records must be
maintained that include a description of
the property, a serial number or other
identification number, the source of
property, who holds title, the acquisition
date, and cost of the property,
percentage of Federal participation tn
the cost of the property, the location, use
and condition of the property, and any
ultimate disposition data including the
date of disposal and sale price of the
property.
(2)	A physical inventory of the
property must be taken and the results
reconciled with the property records at
least once every two years.
(3)	A control system must be
developed to ensure adequate
safeguards to prevent loss, damage, or
theft of the property. Any loss, damage,
or theft shall be investigated.
(4)	Adequate maintenance procedurt
must be developed to keep the property
in good condition.
(5)	If the grantee or subgrantee is
authorized or required to sell the
property, proper sales procedures must
be established to ensure the highest
possible return.
(e)	Disposition. When original or
replacement equipment acquired under
a grant or subgrant is no longer needed
for the original project or program or for
other activities currently or previously
supported by a Federal agency,
disposition of the equipment will be
made as follows:
(1)	Items of equipment with a current
per-unit fair market value of less than
S5.000 may be retained, sold or
otherwise disposed of with no further
obligation to the awarding agency.
(2)	Items of equipment with a current
per unit fair market value in excess of
S5.000 may be retained or sold and the
awarding agency shall have a right to an
amount calculated by multiplying the
current market value or proceeds from
sale by the awarding agency's share of
the equipment
(3)	In cases where a grantee or
subgrantee fails to take appropriate
disposition actions, the awarding agem
may direct the grantee or subgrantee to
take excess and disposition actions.
(f)	Federal equipment In the event a
grantee or subgrantee is provided
federally-owned equipment:
(1)	Title will remain vested in the
Federal Government.
(2)	Grantees or subgrantees will
manage the equipment in accordance
with Federal agency rules and
procedures, and submit an annual
inventory listing.
(3)	When the equipment is no longer
needed, the grantee or subgrantee will
request disposition instructions from the
Federal agency.
(g)	Right to transfer title. The Federal
awarding agency may reserve the right
to transfer title to the Federal
Government or a third part named by
the awarding agency when such a third
party is otherwise eligible under existing
statutes. Such transfers shall be subject
to the following standards:
(1)	The property shall be identified in
the grant or otherwise made known to
the grantee in writing.
(2)	The Federal awarding agency shall
issue disposition instruction within 120
calendar days after the end of the
Federal support of the project for whir
it was acquired. If the Federal awardii
agency fails to issue disposition
instructions within the 120 calendar-day
period the grantee shall follow
	32(e).
-------
6096
Federal Register / Vol. S3, No. 48 / Friday, March 11, 1B86 I Rules and Regulations
(3) When title to equipment is
transferred, the grantee shall be paid an.
amount calculated by applying the
percentage of participation in the
purchase to the current fair market
^alue of the property.
$	.33 Supplies.
(a)	Title. Title to supplies acquired
under a grant or subgrant wilJ vest upon
acquisition, in the grantee or subgrantee
respectively.
(b)	Disposition. If there is a residual
inventory of unused supplies exceeding
$5,000 in total aggregate fair market
value upon termination or completion of
the award, and if the supplies are not
needed for any other federally
sponsored programs or projects, the
grantee or subgrantee shall compensate
the awarding agency for its share.
§	34 Copyrights.
The Federal awarding agency
reserves a royalty-free, nonexclusive,
and irrevocable license to reproduce,
publish or otherwise use. and to
authorize others to use, for Federal
Government purposes:
(a)	The copyright in any work
developed under a grant subgrant or
contract wider a grant or subgrant and
(b)	Any rights of copyright to which a
grantee, subgrantee or s contractor
purchases ownership with grant support.
§	35 Sutwwards to debarred an6
suspended parties.
Grantees and subgrantees must not
make any award or permit any award
(subgrant or contract} at any tier to any
party which is debarred or suspended or
is otherwise excluded from or ineligible
for participation in Federal assistance
programs under Executive Order 12549.
"Detaxrr.enl and Suspension."
§	36 Procurement
(aj Slates, Wher. procuring property
and services under a grant, a State will
follow the same policies and procedures
it uses fcr procurements from its non-
Feders! funds. The State wii! ensure thai
even purchase order or other contract
includes any clauses required by
Federal statutes and executive orders
and their implementing regulations-
Other grantees and subgrantees will
follow paragraphs (b) through (i) in this
section.
(b) Procurement standards. [1]
Grantees and subgrantees will use their
own procurement procedures which
reflect applicable State and local laws
and regulations, provided thai the
procurements conform to applicable
Federal law and the standards identified
in this section.
(2)	Grantees and subgrantees will
maintain a contract administration
system which ensures that contractors
perform in accordance with the terins,
conditions, and specifications of their
contracts or purchase orders.
(3)	Grantees and subgrantees will
maintain a written code of standards of
conduct governing the performance of
their employees engaged in the award
and administration of contracts. No
employee, officer or agent of the grantee
or subgrantee shall participate in
selection, or in the award or
administration of a contract supported
by Federal funds if a conflict of interest
real or apparent would be involved.
Such a conflict would arise when:
(i)	The employee, officer or agent
(ii)	Any member of his immediate
family,
(iii)	His or her partner, or
(iv)	An organization which employs,
or is about to employ, any of the above,
has a financial or other interest in the
firm selected for award. The grantee's or
subgrantee's officers, employees or
agents will neither solicit not accept
gratuities, favors or anything of
monetary value from contractors,
potential contractors, or parties to
subagreements. Grantee and
subgrantees may set minimum rules
where the financial interest is not
substantial or the gift is an unsolicited
item of nominal intrinsic value. To the
extent permitted by State or local taw or
regulations, such standards or conduct
will provide for penalties, sanctions, or
other disciplinary actions for violations
of such standards by the grantee's and
subgrantee's officers, employees, or
agents, or by contractors or their agents.
The awarding agency may in regulation
provide additional prohibitions relative
to real, apparent or potential conflicts
of interest.	/
(4)	Giantee and subgrantee
procedures will provide far a review of
proposed procurements to avoid
purchase of unnecessary or duplicative
items. Consideration should be given to
consolidating or breaking out
procurements to obtain a more
economical purchase. Where
appropriate, an analysis will be made of
lease versus purchase alternatives, and
any other appropriate analysis to
determine the most economical
approach.
15} To foster greater economy and
efficiency, grantees and subgrantees are
encouraged to enter into State and local
intergovernmental agreements for
procurement or use of common goods
and services.
(6) Grantees and subgrantees are
encouraged to use Federal excess and
surplus property in lieu of purchasing
new equipment and property whenever
such use is feasible end reduces project
costs.
(7) Grantees and subgrantees are
encouraged to use value engineering
clauses in contracts for construction
projects of sufficient size to offer
reasonable opportunities for cost
reductions. Value engineering is ¦
systematic and creative anaylsis of each
contract itein or task lo ensure that its
essential function is provided at the
overall lower cost.
(6) Grantees and subgrantees will
make awards only to responsible
contractors possessing the ability to
perform successfully under the terms
and conditions of a proposed
procurement Consideration will be
given to such matters «s contractor
integrity, compliance with public policy,
record of past performance, and
financial and technical resources.
(9)	Grantees and subgrantees will
maintain records sufficient to detail the
significant history of a procurement
These records will include, but are not
necessarily limited to the following:
rationale for die method of procurement
selection of contract type, contractor
selection or rejection, and the basis for
the contract price.
(10)	Grantees and subgrantees will
use time and material type contracts
only—
(i) After a determination that no other
contract is suitable, and
(11)	If the contract includes a ceiling
price that the contractor exceeds at its
own risk.
(11)	Grantees and subgrantees alone
will be responsible, in accordance with
good administrative practice and sound
business judgment, for the settlement of
all contractual and administrative issues
arising out of procurements. These
issues include, but are not limited to
source evaluation, protests, disputes,
and claims. These standards do not
relieve the grantee or subgrantee of any
contractual responsibilities under its
contracts. Federal agencies will not
substitute their judgment for that of the
grantee or subgrantee unless the malter
is primarily a Federal concern.
Violations of law will be referred to the
local. State, or Federal authority having
proper jurisdiction.
(12)	Grantees and subgrantees will
have protest procedures to handle and
resolve disputes relating to their
procurements and shall in all instances
disclose information regarding the
protest to the awarding agency. A
protestor must exhaust all
administrative remedies with the
grantee and subgrantee before pursuing
a protest with the Federal agency.
-------
Federal Register / Vol. 53. No. 48 / Friday. March 11. 19UB / Rules and Revjuldticns
8037
Reviews of protests by the Federal
agency will be limited to:
(i)	Violations of Federal Law or
regulations and the standards of this
section (violations of State or local law
will be under the jurisdiction of State or
local authorities) and
(ii)	Violations of the grantee's or
subgrantee's protest procedures for
failure to review a complaint or protest.
Protests received by the Federal agency
other than those specified above will be
referred to the grantee or subgrantee.
(c) Competition, (l) All procurement
transactions will be conducted in a
manner providing full and open
competition consistent with the
standards of §	36. Some of the
situations considered to be restrictive of
competition include but are not limited
to:
(1)	Placing unreasonable requirements
on firms in order for them to qualify to
do business.
(ii)	Requiring unnecessary experience
and excessive bonding,
(iii)	Noncompetitive pricing practices
between firms or between affiliated
companies.
(iv)	Noncompetitive awards to
consultants that are on retainer
contracts.
(v)	Organizational conflicts of
interest.
(vi)	Specifying only a "brand name"
product instead of allowing "an equal"*
product to be offered and describing the
performance of other relevant
requirements of the procurement, and
(vii)	Any arbitrary action in the
procurement process.
(2)	Grantees and subgrantees will
conduct procorements in a manner that
prohibits the use of statutorily or
administratively imposed in-Stale or
local geographical preferences in the
evaluation of bids or proposals, except
in those cases where applicable Federal
statutes expressly mandate or
encourage geographic preference.
Nothing in this section preempts State
licensing laws. When contracting for
architectural and engineering (A/E)
services, geographic location may be a
selection criteria provided its
application leaves an appropriate
number of qualified firms, given the
nature and size of the project, to
compete for the contract.
(3)	Grantees will have written
selection procedures for procurement
transactions. These procedures will
ensure that all solicitations:
(i) Incorporate a clear and accurate
description of the technical
requirements for the material, product,
or service to be procured. Such
description shall not. in competitive
procurements, contain features which
unduly restrict competition. Thj
description may include a statement of
the qualitative nature of the material,
product or service to be procured, and
when necessary, shall set forth those
minimum essential characteristics and
standards to which it must conform if it
is to satisfy its intended use. Detailed
product specifications should be
avoided if at all possible. When it is
impractical or uneconomical to make a
clear and accurate description of the
technical requirements, a "brand name
or equal" description may be used as a
means to define the performance or
other salient requirements of a
procurement. The specific features of the
named brand which must be met by
offerors shall be clearly stated: and
(ii) Identify all requirements which the
offerors must fulfill and all other factors
to be used in evaluating bids or
proposals.
(4) Grantees and subgrantees will
ensure that all prequalified lists of
persons, firms, or products which are
used in acquiring goods and services are
current and include enough qualified
sources to ensure maximum open and
free competition. Also, grantees and
subgrantees will not preclude potential
bidders from qualifying during the
solicitation period.
(d) Methods of procurement to be
followed. (1) Procurement by small
purchase procedures. Small purchase
procedures are those relatively simple
and informal procurement methods for
securing services, supplies, or other
property that do not cost more than
S2&0OO in the aggregate. If small
purchase procurements are used, price
or rate quotations wilt be obtained from
an adequate number of qualified
sources.
(2) Procurement by sealed bids
(formal advertising). Bids are publicly
solicited and a firm-fixed-price contract
(lump sum or unit price) is awarded to
the responsible bidder whose bid.
conforming with all the material terms
and conditions of the invitation for bids,
is the lowest in price. The sealed bid
method is the preferred method for
procuring construction, if the conditions
in §	36fd)(2)(i) apply.
(i) In order for sealed bidding to be
feasible, the following conditions should
be present:
(A)	A complete, adequate, and
realistic specification or purchase
description is available;
(B)	Two or more responsible bidders
are willing and able to compete
effectively for the business: and
(C)	The procurement lends itself to a
firm fixed price contract and the
selection of the successful bidder can be
made principally on the basis of price
(ii) If scjled bids .ire used. thi!
following requirements apply:
(A)	The invitation for bids will be
publicly advertised and bids shall be
solicited from an adequate numbor of
known suppliers, providing them
sufficient time pnor to the date se' for
opening the bids:
(B)	The invitation for bids, which will
include any specifications and pertinent
attachments, shall define the items or
services in order for the bidder to
properly respond:
(C)	All bids will be publicly opened at
the time and place prescribed in the
invitation for bids:
(D)	A firm fixed-price contract award
will be made in writing to the lowest
responsive and responsible bidder.
Where specified in bidding documents,
factors such as discounts, transportation
cost and life cycle costs shall be
considered in determining which bid is
lowest. Payment discounts will only be
used to determine the low bid when
prior experience indicates that such
discounts are usually taken advantage
of; and
(E)	Any or all bids may be rejected if
there is a sound documented reason.
(3) Procurement by competitive
proposals. The technique of compeniive
proposals is normally conducted with
more than one source submitting an
offer, and either a fixed-price or cost-
reimbursement type contract is
awarded. It is generally used when
conditions are not appropriate for the
use of sealed bids. If this method is
used, the following requirements apply:
(i)	Requests for proposals will be
publicized and identify all evaluation
factors and their relative importance.
Any response to publicized requests for
proposals shall be honored to the
maximum extent practical:
(ii)	Proposals will be solicited from an
adequate' number of qualified sources:
(iii)	Grantees and subgrantees will
have a method for conducting technical
evaluations of the proposals received
and for selecting awardees:
(iv)	Awards will be made to the
responsible firm whose proposal is most
advantageous to the program, with pnee
and other factors considered: arid
(v)	Grantees and subgrantees may use
competitive proposal procedures for
qualifications-based procurement of
architectural/engineering [A/F.)
professional services whereby
competitors' qualifications are
evaluated and the most qualified
competitor is selected, subject to
negotiation of fair and reasonable
compensation. The method, where price
is not used as a selection factor, can
only be used in procurement of A/E
-------
8098	Federal Register / Vol. 53, No. 48 / Friday, March 11. 1988 / Rules and Regulations
professional services. It cannot be used
lo purchase other types of services
though A/E firms are a potential source
to perform the proposed effort.
(4) Procurement by noncompetitive
proposals is procurement through
solicitation of a proposal from only one
source, or after solicitation of a number
of sources, competition is determined
inadequate.'
(1)	Procurement by noncompetitive
proposals may be used only when the
award of a contract is infeasible under
small purchase procedures, sealed bids
or competitive proposals and one of the
following circumstances applies:
(A)	The item is available only from a
single source;
(B)	The public exigency or emergency
for the requirement will not permit a
delay resulting from competitive
solicitation.
(C)	The awarding agency authorizes
noncompetitive proposals: or
(DJ After solicitation of a number of
sources, competition is determined
inadequate.
(ii)	Cost analysis, i.e., verifying the
proposed cost data, the projections of
the data, and the evaluation of the
specific elements of costs and profit is
required.
(iii)	Grantees and subgrantees may be
required to submit the proposed
procurement to the awarding agency for
pre-award review in accordance with
paragraph (g) of this section.
(e) Contracting with small and
minority firms, women's business
enterprise and labor surplus area firms.
(1) The grantee and subgrantee will take
all necessary affirmative steps to assure
that minority firms, women's business
enterprises, and labor surplus area firms
are used when possible.
(2)	Affirmative steps shall include:
(i) Placing qualified small and
minority businesses and women's
business enterprises on solicitation lists:
(n) Assuring that small and minority
businesses, and women's business
enterprises are solicited whenever they
are potential sources:
(iii)	Dividing total requirements, when
economically feasible, into smaller tasks
or quantities to permit maximum
participation by small and minority
business, and women's business
enterprises:
(iv)	Establishing deliver}' schedules,
where the requirement permits, which
encourage participation by small and
minority business, and women's
business enterprises:
(v)	Using the services and assistance
of the Small Business Administration,
and the Minority Business Development
Agency of the Department of Commerce:
and
(vi) Requiring the prime contractor, if
subcontracts are to be let. to take the
affirmative steps listed in paragraphs
(e)(2) (i) through (v) of this section.
(f)	Contract cost and price. (1)
Grantees and subgrantees must perform
a cost or price analysis in connection
with every procurement action including
contract modifications. The method and
degree of analysis is dependent on the
facts surrounding the particular
procurement situation, but as a starting
point, grantees must make independent
estimates before receiving bids or
proposals. A cost analysis must be
performed when the offeror is required
to submit the elements of his estimated
cost. e.g.. under professional, consulting,
and architectural engineering services
contracts. A cost analysis will be
necessary when adequate price
competition is lacking, and for sole
source procurements, including contract
modifications or change orders, unless
price resonableness can be established
on the basis of a catalog or market price
of a commercial product sold in
substantial quantities to the general
public or based on prices set by law or
regulation. A price analysis will be used
in all other instances to determine the
reasonableness of the proposed contract
price.
(2)	Grantees and subgrantees will
negotiate profit as a separate element of
the price for each contract in which
there is no price competition and in all
cases where cost analysis is performed.
To establish a fair and reasonable profit
consideration will be given to the
complexity of the work to be performed,
the risk borne by the contractor, the
contractor's investment, the amount of
subcontracting, the quality of its record
of past performance, and industry profit
rates in the surrounding geographical
area for similar work.
(3)	Costs or prices based on estimated
costs for contracts under grants will be
allowable only to the extent that costs
incurred or cost estimates included in
negotiated prices are consistent with
Federal cost principles (see §	22).
Grantees may reference their own cost
principles that comply with the
applicable Federal cost principles.
(4)	The cost plus a percentage of cost
and percentage of construction cost
methods of contracting shall not be
used.
(g)	A warding agency review, (l)
Grantees and subgrantees must make
available, upon request of the awarding
agency, technical specifications on
proposed procurements where the
awarding agency believes such review
is needed to ensure that the item and/or
serv ice specified is the one being
proposed for purchase. This review
generally will take place prior to the
time the specification is incorporated
into a solicitation document. However, if
the grantee or subgrantee desires to
have the review accomplished after a
solication has been developed, the
awarding agency may still review the
specifications, with such review usually
limited to the technical aspects of the
proposed purchase.
(2)	Grantees and subgrantees must on
request make available for awarding
agency pre-award review [ delete
procurement documents, such as
requests for proposals or invitations for
bids, independent cost estimates, etc^
when:
(i)	A grantee's or subgrantee's
procurement procedures or operation
fails to comply with the procurement
standards in this seciton; or
(ii)	The procurement is expected to
exceed S25.000 and is to be awarded
without competition or only one bid or
offer is received in response to a
solicitation; or
(iii)	The procurement, which is
expected to exceed S25.000. specifies a'
"brand name" product; or
(iv)	The proposed award over $25,000
is to be awarded to other than the
apparent low bidder under a sealed bid
procurement; or
(v)	A proposed contract modification
changes the scope of a contract or
increases the contract amount by more
than £25.000.
(3)	A grantee or subgrantee will be
exempt from the pre-award review in
paragraph (g)(2) of this section if the
awarding agency determines that its
procurement systems comply with the
standards of this section.
(i)	A grantee or subgrantee may
request-th"at its procurement system be
reviewed by the awarding agency to
determine whether its system meets
these standards in order for its system
to be certified. Generally, these reviews
shall occur where there is a continuous
high-dollar funding, and third-party
contracts are awarded on a regular
basis:
(ii)	A grantee or subgrantee may self-
certify its procurement system. Such
self-certification shall not limit the
awarding agency's right to survey the
system. Under a self-certification
procedure, awarding agencies may wish
to relv on written assurances from the
grantee or subgrantee that it is
complying with these standards. A
grantee or subgrantee will cite specific
procedures, regulations, standards, etc..
as being in compliance with these
requirements and have its system
available for review.
-------
Federal Register / Vol. 53, No. 48 / Friday. March 11. 1988 / Rules and Regulations	SO^
(h)	Bonding requirements. For
construction or facility improvement
contracts or subconstracts exceeding
$100,000. the awarding agency may
accept the bonding policy and
requirements of the grantee or
subgrantee provided the awarding
agency has made a determination that
the awarding agency's interest is
adequately protected. If such a
determination has not been made, the
minimum requirements shall be as
follows:
(1)	A bid guarantee from each bidder
equivalent to five percent of the bid
price. The "bid guarantee" shall consist
of a firm commitment such as a bid
bond, certified check, or other
negotiable instrument accompanying a
bid as assurance that the bidder will,
upon acceptance of his bid. execute
such contractual documents as may be
required within the time specified.
(2)	A performance bond on the part of
the contractor for 100 percent of the
contract price. A "performance bond" is
one executed in connection with a
contract to secure fulfillment of all the
contractor's obligations under such
contract.
(3)	X payment bond on the part of the
contractor for 100 percent of the
contract price. A "payment bond" is one
executed in connection with a contract
to assure payment as required by law of
all persons supplying labor and material
in the execution of the work provided
for in the contract.
(i)	Contract provisions. A grantee's
and subgrantees contracts must contain
provisions in paragraph (i) of this
Section. Federal agencies are permitted
to require changes, remedies, changed
conditions, access and records
retention, suspension of work, and other
clauses approved by the Office of
Procurement Policy.
(1)	Administrative, contractual, or
legal remedies in instances where
contractors violate or breach contract
terms, and provide for such sanctions
and penalties as may be appropriate.
(Contracts other than small purchases)
(2)	Termination for cause and for
convenience by the grantee or
subgrantee including the manner by
which it will be effected and the basis
for settlement. (All contracts in excess
of $10,000)
(3)	Compliance with Executive Order
11246 of September 24.1985 entitled
"Equal Employment Opportunity," as
amended by Executive Order 11375 of
October 13.1967 and as supplemented in
Department of Labor regulations (41
CFR Part 60). (All construction contracts
awarded in excess of $10,000 by
grantees and their contractors or
subgrantees)
(4)	Compliance with the Copeland
"Anti-Kickback" Act (18 U.S.C. 874) as
supplemented in Department of Labor
regulations (29 CFR Part 3). (All
contracts and subgrants for construction
or repair)
(5)	Compliance with the Davis-Bacon
Act (40 U.S.C. 276a to a-7) as
supplemented by Department of Labor
regulations (29 CFR Part 5).
(Construction contracts in excess of
$2,000 awarded by grantees and
subgrantees when required by Federal
grant program legislation)
(6)	Compliance with Sections 103 and
107 of the Contract Work Hours and
Safety Standards Act (40 U.S.C. 327-330)
as supplemented by Department of
Labor regulations (29 CFR Part 5).
(Construction contracts awarded by
grantees and subgrantees in excess of
S2.000. and in excess of 52,500 for other
contracts which involve the employment
of mechanics or laborers)
(7)	Notice of awarding agency
requirements and regulations pertaining
to reporting.
(8)	Notice of awarding agency
requirements and regulations pertaining
to patent rights with respect to any
discover^' or invention which arises or is
developed in the course of or under such
contract.
(9)	Awarding agency requirements
and regulations pertaining to copyrights
and rights in data.
(10)	Access by the grantee, the
subgrantee. the Federal grantor agency,
the Comptroller General of the United
States, or any of their duly authorized
representatives to any books,
documents, papers, and records of the
contractor which are directly pertinent
to that specific contract for the purpose
of making audit, examination, excerpts,
and transcriptions.
(11)	Retention of all required records
for three years after grantees or
subgrantees make final payments and
all other pending matters are closed.
(12)	Compliance with all applicable
standards, orders, or requirements
issued under section 306 of the Clear Air
Act (42 U.S.C. 1857(h)). section 508 of the
Clean Water Act (33 U.S.C. 1368),
Executive Order 11738, and
Environmental Protection Agency
regulations (40 CFR Part 15). (Contracts,
subcontracts, and subgrants of amounts
in excess of $100,000)
(13)	Mandatory standards and policies
relating to energy efficiency which are
contained in the state energy
conservation plan issued in compliance
with the Energy Policy and
Conservation Act (Pub. L 9+-163).
§	.37 Subgrants.
(a)	States. States shall follow state
law and procedures when awarding and
administering subgrants (whether on a
cost reimbursement or fixed amount
basis) of financial assistance to local
and ladian tribal governments. States
shall:
(1)	Ensure that every subgrant
includes any clauses required by
Federal statute and executive orders
and their implementing regulations;
(2)	Ensure that subgrantees are aware
of requirements imposed upon them by
Federal statute and regulation:
(3)	Ensure that a provision for
compliance with Section	42 is
placed in every cost reimbursement
subgrant; and
(4)	Conform any advances of grant
funds to subgrantees substantially to the
same standards of timing and amount
that apply to cash advances by Federal
agencies.
(b)	All other grantees. All other
grantees shall follow the provisions of
this part which are applicable to
awarding agencies when awarding and
administering subgrants (whether on a
cost reimbursement or fixed amount
basis) of financial assistance to local
and Indian tribal governments. Grantees
shall:
(1)	Ensure that every subgrant
includes a provision for compliance with
this part:
(2)	Ensure that every subgrant
includes any clauses required by
Federal statute and executive orders
and their implementing regulations; and
(3)	Ensure that subgrantees are aware
of requirements imposed upon them by
Federal statutes and regulations.
(c)	Exceptions. By their own terms,
certain provisions of this part do not
apply to the award and administration
of subgrants:
(1)	Section	10;
(2)	Section	11;
(3)	The letter-of-credit procedures
specified in Treasury Regulations at 31
CFR Part 205, cited in §	21: and
(4)	Section	50.
Reports, Records, Retention, and
Enforcement
§	40 Monitoring and reporting
program performance.
(a) Monitoring by grantees. Grantees
are responsible for managing the day-
day operations of grant and subgrant
supported activities. Grantees must
monitor grant and subgrant supported
activities to assure compliance with
applicable Federal requirements and
that performance goals are being
-------
8100
Federal Register / Vol. 53. No. 48 / Friday. March 11. 1986 / Rules and Regulations
achieved. Grantee monitoring must
cover each program, function or activity.
(b| Nonconstruction performance
reports. The Federal agency may, if it
decides that performance information
available from subsequent applications
contains sufficient information to meet
its programmatic needs, require the
grantee to submit a performance report
only upon expiration or termination of
grant support. Unless waived by the
Federal agency this report will be due
on the same date as the final Financial
Status Report
(1)	Grantees shall submit annual
performance reports unless the
awarding agency requires quarterly or
semi-annual reports. However,
performance reports will not be required
more frequently than quarterly. Annual
reports shall be due 90 days after the
grant year, quarterly or semi-annual
reports shall be due 30 days after the
reporting period. The final performance
report will be due 90 days after the
expiration or termination of grant
support. If a justified request is
submitted by a grantee, the Federal
agency may extend the due date for any
performance report. Additionally,
requirements for unnecessary
performance reports may be waived by
the Federal agency.
(2)	Performance reports will contain,
for each grant, brief information on the
following;
(i)	A comparison of actual
accomplishments to the objectives
established for the period. Where the
output of the project can be quantified, a
computation of the cos: per unit of
output may be required if that
information will be useful.
(ii)	The reasons for slippage if
established objectives were not met.
(iii)	Additional pertinent information
including, when appropriate, analysis
and explanation of cost overruns or high
ur.it costs.
(3)	Grantees will not be required to
submit more than the original and two
copies of performance reports.
(4)	Grantees will adhere to the
standards in this section in prescribing
performance reporting requirements for
subgrantees.
(c) Construction performance reports.
For the most part, on-site technical
inspections and certified percentage-of-
completion data are relied on heavily by
Federal agencies to monitor progress
under construction grants and
subgrants. The Federal agency will
require additional formal performance
reports only wher. considered
necessary, and never more frequently
than quarterly.
(rij Significant developments. Events
nifty occur between the scheduled
performance reporting dates which have
significant impact upon the grant or
subgrant supported activity. In such
cases, the grantee must inform the
Federal agency as soon as the following
types of conditions become known:
(1)	Problems, delays, or adverse
conditions which will materially impair
the ability to meet the objective of the
award. This disclosure must include a
statement of the action taken, or
contemplated, and any assistance
needed to resolve the situation.
(2)	Favorable developments which
enable meeting time schedules and
objectives sooner or at less cost than
anticipated or producing more beneficial
results than originally planned.
(e)	Federal agencies may make site
visits as warranted by program needs.
(f)	Waivers, extensions. (1) Federal
agencies may waive any performance
report required by this part if not
needed.
(2) The grantee may waive any
performance report from a subgrantee
when not needed. The grantee may
extend the due date for any performance
report from a subgrantee if the grantee
will still be able to meet its performance
reporting obligations to the Federal
agency.
§	.41 Financial Reporting.
(a) General. (1) Except as provided in
paragraphs (a) (2) and (5) of this section,
grantees will use only the forms
specified in paragraphs (a) through (e) of
this section, and such supplementary or
other forms as may from time to time be
authorized by OMB. for
(1)	Submitting financial reports to
Federal agencies, or
(ii) Requesting advances or
reimbursements.w^en letters of credit
are not used.
(2)	Grantees need not apply the forms
prescribed in this section in dealing with
their subgraintees. However, grantees
shall not impose more burdensome
requirements on subgrantees.
(3)	Grantees shall follow all
applicable standard and supplemental
Federal agency instructions approved by
OMB to the extend required under the
Paperwork Reduction Act of 1980 for use
in connection with forms specified in
paragraphs (b) through (e) of this
section. Federal agencies may issue
substantive supplementary instructions
only with the approval of OMB. Federal
agencies may shade out or instruct the
grantee to disregard any line item that
the Federal agency finds unnecessary
tor its decisionmaking purposes.
(4)	Grantees wili not be required to
submit more than the original and two
copies of forms required under this part.
(5)	Federal agencies may provide
computer outputs to grantees to expedite
or contribute to the accuracy of
reporting. Federal agencies may accept
the required information from grantees
in machine usable format or computer
printouts instead of prescribed forms.
(6)	Federal agencies may waive any
report required by this section if not
needed.
(7)	Federal agencies may extend the
due date of any financial report upon
receiving a justified request from a
grantee.
(b)	Financial Status Report.—(1)
Form. Grantees will use Standard Form
269 or 269A. Financial Status Report, to
report the status of funds for all
nonconstruction grants and for
construction grants when required in
accordance with paragraph
S	41(e)(2)(iii) of this section.
(2)	Accounting basis. Each grantee
will report program outlays and program
income on a cash or accrual basis as
prescribed by the awarding agency. If
the Federal agency requires accrual
information and the grantee s
accounting records are not normally
kept on the accural basis, the grantee
shall not be required to convert its
accounting system but shall develop -
such accrual information through and
analysis of the documentation on hand.
(3)	Frequency. The Federal agency
may prescribe the frequency of the
report for each project or program.
However, the report will not be required
more frequently than quarterly. If the
Federal agency does not specify the
frequency of the report it will be
submitted annualiy. A final report will
be required upon expiration or
termination of grant support
(4)	Due dale. Wher. reports are
required or. a quarterly or semiannual
basis, they will be due 30 days after the
reporting period. When required on an
annual basis, they will be due an days
after the grant year. Final reports will be
due 90 days after the expiretmn or
termination of grant support.
(c)	Federal Cash Transact:^;)?
Report—(1) Form, (i) For g:ar.is paid by
letter or credit. Treasury check
advances or electronic transfer of funds,
the grantee will submit the Standard
Form 272. Federal Cash Transactions
Report, and when necessary, its
continuation sheet. Standard Form 272a,
unless the terms of the award exempt
the grantee from this requirement.
(ii) These reports will be used by the
Federal agency to monitor cash
advanced to grantees and to obtain
disbursement or outlay information for
each grant from grantees. The format of
the report may be adapted as
-------
Federal Register / Vol. 53, No. 46 / Friday. March 11, 1988 / Rules and Regulations
8101
appropriate when reporting is to be
accomplished with the assistance of
automatic data processing equipment
provided that the information to be
submitted is not changed in substance.
(2)	Forecasts of Federal cash
requirements. Forecasts of Federal cash
requirements may be required in the
"Remarks" section of the report.
(3)	Cash in hands of subgrantees.
When considered necessary and
feasible by the Federal agency, grantees
may be required to report the amount of
cash advances in excess of three days'
needs in the hands of their subgrantees
or contractors and to provide short
narrative explanations of actions taken
by the grantee to reduce the excess
balances.
(4)	Frequency and due date. Grantees
must submit the report no later than 15
working days following the end of each
quarter. However, where an advance
either by letter of credit or electronic
transfer-of funds is authorized at an
annualized rate of one million dollars or
more, the Federal agency may require
the report to be submitted within 15
working days following the end of each
month.
(d)	Request for advance or
reimbursement—(1) Advance payments.
Requests for Treasury check advance
payments will be submitted on Standard
Form 270. Request for Advance or
Reimbursement. [This form will not be
used for drawdowns under a letter of
credit, electronic funds transfer or when
Treasury check advance payments are
made to the grantee automatically on a
predetermined basis.)
(2)	Reimbursements. Requests for
reimbursement under nonconstruction
grants will also be submitted on
Standard Form 270. (For reimbursement
requests under construction grants, see
paragraph (e)(1) of this section.)
(3)	The frequency for submitting
payment requests is treated in
5	41(b)(3).
(e)	Outlay report and request for
reimbursement for construction
programs. (1) Grants that Bupport
construction activities paid by
reimbursement method.
(1)	Requests for reimbursement under
construction grants will be submitted on
Standard Form 271, Outlay Report and
Request for Reimbursement for
Construction Programs. Federal agencies
may, however, prescribe the Request for
Advance or Reimbursement form,
specified in §	41(d), instead of this
form.
(ii) The frequency for submitting
reimbursement requests is treated in
5	41(b)(3).
(2)	Grants that support construction
activities paid by letter of credit.
electronic funds transfer or Treasury
check advance.
(i)	When a construction grant is paid
by letter of credit, electronic funds
transfer or Treasury check advances,
the grantee will report its outlays to the
Federal agency using Standard Form
271, Outlay Report and Request for
Reimbursement for Construction
Programs. The Federal agency will
provide any necessary special
instruction. However, frequency and due
date shall be governed by 3	41(b)
(3) and (4).
(ii)	When a construction grant is paid
by Treasury check advances based on
periodic requests from the grantee, the
advances will be requested on the form
specified in §	41(d).
(iii)	The Federal agency may
substitute the Financial Status Report
specified in J'	41(b) for the Outlay
Report and Request for Reimbursement
for Construction Programs.
(3) Accounting basis. The accounting
basis for the Outlay Report and Request
for Reimbursement for Construction
Programs shall be governed by
5	41(b)(2).
§	42 Retention and access
requirements (or record*.
(a)	Applicability. (1) This section
applies to all financial and
programmatic records, supporting
documents, statistical records, and other
records of grantees or subgrantees
which are:
(1)	Required to be maintained by the
terms of this Part program regulations
or the gTant agreement, or
(ii) Otherwise reasonably considered
as pertinent to program regulations or
the grant agreement.
(2)	This section does not apply to
records maintained by contractors or
subcontractors. For a requirement to
place a provision concerning records in
certain kinds of contracts, see
5	36(i)(10).
(b)	Length of retention period. (1)
Except as otherwise provided, records
must be retained for three years from
the starting date specified in paragraph
(c) of this section.
(2)	If any litigation, claim, negotiation,
audit or other action involving the
records has been started before the
expiration of the 3-year period, the
records must be retained until
completion of the action and resolution
of all issues which arise from it, or until
the end of the regular 3-year period,
whichever is later.
(3)	To avoid duplicate recordkeeping,
awarding agencies may make special
arrangements with grantees and
subgrantees to retain any records which
are continuously needed for joint use.
The awarding agency will request
transfer of records to its custody when
determines that the records possess
long-term retention value. When the
records are transferred to or maintained
by the Federal agency, the 3-year
retention requirement is not applicable
to the grantee or subgrantee.
(c) Starting date of retention period—
(1) General. When gTant support is
continued or renewed at annual or other
intervals, the retention period for the
records of each funding period starts on
the day the grantee or subgrantee
submits to the awarding agency its
single or last expenditure report for that
period. However, if grant support is
continued or renewed quarterly, the
retention period for each year's records
starts on the day the grantee submits its
expenditure report for the last quarter of
the Federal fiscal year. In all other
cases, the retention period starts on the
day the grantee submits its final
expenditure report. If an expenditure
report has been waived, the retention
period starts on the day the report
would have been due.
(2)	Real property and equipment
records. The retention period for real
property and equipment records starts
from the date of the disposition or
replacement or transfer at the directior,
of the awarding agency.
(3)	Records for income transactions
after grant or subgrant support. In some
cases grantees must report income after
the period of grant support. Where there
is such a requirement the retention
period for the records pertaining to the
earning of the income starts from the
end of the grantee's fiscal year in which
the income is earned.
(4)	Indirect cost rote proposals, cost
allocations plans, etc. This paragraph
applies to the following types of
documents, and their supporting records:
indirect cost rate computations or
proposals, cost allocation plans, and any
similar accounting computations of the
rate at which a particular group of costs
is chargeable (such as computer usage
chargeback rates or composite fringe
benefit rates).
(i)	If submitted for negotiation. If the
proposal, plan, or other computation is
required to be submitted to the Federal
Government (or to the grantee) to form
the basis for negotiation of the rate, then
the 3-year retention period for its
supporting records starts from the date
of such submission.
(ii)	If not submitted for negotiation. If
the proposal, plan, or other computat:
is not required to be submitted to the
Federal Government (or to the grante^
for negotiation purposes, then the 3-year
retention period for the proposal plan, or
-------
8102
Federal Register / Vol. 53. No. 48 / Friday. March 11, 1988 / Rules and Regulations
computation and its supporting records
starts from end of the fiscal year (or
other accounting period) covered by the
proposal, plan, or other computation.
(d)	Substitution of microfilm. Copies
made by microfilming, photocopying, or
similar methods may be substituted for
the original records.
(e)	Access to records—{1) Records of
grantees and subgrantees. The awarding
agency and the Comptroller General of
the United States, or any of their
authorized representatives, shall have
the right of access to any pertinent
books, documents, papers, or other
records of grantees and subgrantees
which are pertinent to the grant, in order
to make audits, examinations, excerpts,
and transcripts.
(2) Expiration of right of access. The
rights of access in this section must not
be limited to the required retention
period but shall last as long as the
records are retained.
(f)	Restrictions on public access. The
Federal Freedom of Informabon Act (5
U.S.C. 552) does not apply to records
Unless required by Federal. State, or
local law. grantees and subgrantees are
not required to permit public access to
their records.
§	43 Enforcement.
(a)	Remedies for noncompliance. If a
grantee or subgrantee materially fails to
comply with any term of an award,
whether stated in a Federal statute or
regulation, an assurance, in a State plan
or application, a notice of award, or
elsewhere, the awarding agency may
take one or more of the following
actions, as appropriate in the
circumstances:
(1)	Temporarily withhold cash
payments pending correction of the
deficiency by the grantefor subgrantee
or more severe enforcement action by
the awarding agency.
(2)	Disallow (that is. deny both use of
funds and matching credit for) all or part
of the cost of the activity or action not in
compliance.
(3)	Wholiy or partly suspend or
terminate the current award for the
grantee's or subgrantee's-program,
(4)	Withhold further awards for the
program, or
(5)	Take other remedies that may be
legally available.
(b)	Hearings, appeals. In taking an
enforcement action, the awarding
agency will provide the grantee or
subgrantee an opportunity for such
hearing, appeal, or other administrative
proceeding to which the grantee or
subgrantee is entitled under any statute
or regulation applicable to the action
involved.
(c)	Effects of suspension and
termination. Costs of grantee or
subgrantee resulting from obligations
incurred by the grantee or subgrantee
during a suspension or after termination
of an award are not allowable unless
the awarding agency expressly
authorizes them in the notice of
suspension or termination or
subsequently. Other grantee or
subgrantee costs during suspension or
after termination which are necessary
and not reasonably avoidable are
allowable if:
(1)	The costs result from obligations
which were properly incurred by the
grantee or subgrantee before the
effective date of suspension or
termination, are not in anticipation of it
and. in the case of a termination, are
noncancellable. and.
(2)	The costs would be allowable if
the award were not suspended or
expired normally at the end of the
funding period in which the termination
takes effect
(d)	Relationship to Debarment and
Suspension. The enforcement remedies
identified in this section, including
suspension and termination, do not
preclude grantee or subgrantee from
being subject to "Debarment and
Suspension" under E.0.12548 (see
{	35).
5	.44 Termination for convenience.
Except as provided in 5	43
awards may be terminated in whole or
in part only as follows:
(a) By the awarding agency with the
consent of the grantee or subgrantee in
which case the two parties shall agree
upon the termination conditions,
including the effective date and in the
case of partial termination, the portion
to be terminated, or
fb) By the grantee or subgrantee upon
written notification to the awarding
agency, setting forth the reasons for
such termination, the effective date, and
in the case of partial termination, the
portion to be terminated. However, if, in
the case of a partial termination, the
awarding agency determines that the
remaining portion of the award will not
accomplish the purposes for which the
award was made, the awarding agency
may terminate the award in its entirety
under either §	43 or paragraph (a)
of this section.
Subpart D—Atter-The-Grant
Requirements
§	50 Closeout
(a) General. The Federal agency will
close out the award when it determines
that all applicable administrative
actions and all required work of the
grant has been completed.
(b)	Reports. Within 90 days after the
expiration or termination of the grant
the grantee must submit all financial,
performance, and other reports required
as a condition of the grant. Upon request
by the grantee. Federal agencies may
extend this timeframe. These may
include but are not limited to:
(1)	Final performance or progress
report
(2)	Financial Status Report (SF269) or
Outlay Report and Request for
Reimbursement for Construction
Programs (SF-271) fas applicable.)
(3)	Final request for payment (SF-270)
(if applicable).
(4)	Invention disclosure (if
applicable).
(5)	Federally-owed property report:
In accordance with 5	32(f). a
grantee must submit an inventory of all
federally owned property (a6 distinct
from property acquired with grant
funds) for which it is accountable and
request disposition instructions from the
Federal agency of property no longer
needed.
(c)	Cost adjustment. The Federal
agency wilL within 90 days after receipt
of reports in paragraph (b) of this
section, make upward or downward
adjustments to the allowable costs.
(d)	Cash adjustments. (1) The Federal
agency will make prompt payment to the
grantee for allowable reimbursable
costs.
(2) The grantee must immediately
refund to the Federal agency any
balance of unobligated (unencumbered)
cash advanced that is not authorized to
be retained for use on other grants.
§	.51 Later disallowances and
adjustments.
The closeout cf a grant does not
affect:
(a)	The Federal agency's right to
disallow costs and recover funds on the
basis of a later audit or other review;
(b)	The grantee's obligation to return
any funds due as a result of later
refunds, corrections, or other
transactions:
(c)	Records retention as required in
§	42:
(d)	Property management
requirements in §§	31 and
§	32: and
(e)	Audit requirements in §	26.
§	52 Collection of amounts due.
(a) Any funds paid to a grantee in
excess of the amount to which the
grantee is finally determined to be
entitled under the terms of the award
constitute a debt to the Federal
-------
Federal Register / Vol. 53, No. 48 / Friday. March 11. 1988 / Rules and Regulations	8103
Government. If not paid within a
reasonable period after demand, the
Federal agency may reduce the debt by:
(1)	Making an adminstrative offset
against other requests for
reimbursements.
(2)	Withholding advance payments
otherwise due to the grantee, or
(3)	Other action permitted by law.
(b) Except where otherwise provided
by statutes or regulations, the Federal
agency will charge interest on an
overdue debt in accordance with the
Federal Claims Collection Standards (4
CFR Ch. II). The date from which
interest is computed is not extended by
litigation or the filing of any form of
appeal.
Subpart E—Entitlement [Reserved)
|FR Dor. 88-5251 Filed 3-10-88: 8:45 um|
BILLING COOES 34IO-«S-M. MM-O-M. M3S-0I-M.
3S10-FE-M. 4710-2Y-M. 4H0O2-M. 4410-lt-M. 4510-
7J-M. S7J3-01-M. U10-01-M. 4000-01-M. 7515-01-JH.
U2Q-01-M. SMO-tO-M. 4310-flF-*L (71S-21-M. 4150-
04-M. 755J-01-M. 7S37-OI-M. 7534-0<-U. 70M-01-M
G0S0-2S-M. U40-01-M. 4V10-42-M
-------
6
-------
Office of Management and Budget Circular A-110 (7/30/76)
Attachment O.—Cncuui No. A-110
raocrmrMEMT ttamdahds
1. This attachment provides standards lor
use by recipients In establishing procedures
for the procurement of supplies, equipment,
construction and other services with Federal
funds. These standards are furnished to en-
sure that such materials and services are ob-
tained in an effective manner and in com-
pliance with the provisions of applicable Fed-
eral law and executive orders. No additional
procurement standards or requirements shall
be imposed by the Federal sponsoring agen-
cies upon recipients unless specifically re-
quired by Federal statute or executive orders.
2 The standards contained in this attach-
ment do not relieve the recipient of the con-
tractual responsibilities arising under Its
contracts The recipient Is the responsible au-
thority. without recourse to the Federal spon-
soring agency regarding the settlement and
satisfaction of ail contractual and adminis-
trative Issuer arising out of procurements
entered into, in support of a grant or other
agreement. This includes disputes, claims,
protests of award, source evaluation or other
matters of a contractual nature. Matters con-
cerning violation of law are to be referred to
such local. State or Federal authority as may
have proper jurisdiction.
3. Recipients may use their own procure-
ment policies and procedures However, all re-
cipients shall adhere to the standards set
forth in paragraphs 3 and 4.
a.	The recipient shall maintain a code or
standards of conduct that shall govern the
performance of Its officers, employees or
agents engaged in the awarding and admin-
istration of contracts using Federal funds.
No employee, officer or agent shall participate
in the selection, award or administration of
a contract la which Federal funds are used,
where, to his knowledge, he or his Immediate
ramlly, partners, or organization In which he
or his Immediate family or partner has a
financial interest or with whom he ts nego-
tiating or has any arrangement concerning
prospective employment. The recipients' of-
ficers, employees or agents shall neither solic-
it nor accept gratuities, favors or anything
of monetary value from contractors or poten-
tial contractors. Such standards shall provide
for disciplinary actions to be applied for vio-
lations of such standards by the recipients'
officers, employees or agents.
b.	All procurement transactions shall be
conducted in a manner to provide, to the
maximum extent practical, open and free
competition. The recipient should be alert
to organizational conflicts of Interest or non-
competitive practices among contractors
that may ressict or	competition
or otherwise restrain trad*. In order to en-
sura objective contractor performance and
eliminate unfair competitive advantage, eon-
tractors that develop or draft specifications,
requiramena. statements of wort. Invita-
tions for bids and/or requests tor pmsials
ahould.be excluded from competing for such
procurements. Awards shall be made to the
btdder/offerar whose bid/offer is responsive
to the solicitation and is moat advantageous
to the recipient, price and other factors con-
sidered. Solicitations shall clearly sat fortto
all requirements that the bidder/offeror must
fulfill la order for hie Md/offer to be evalu-
ated by the recipient. Any and all Mds/offen
may be rejeoted when It is la the recipient's
interest to do so.
c.	All recipients shall establish procure-
ment procedures that provide tar, at a min-
imum. the following procedural requirements.
(1)	Proposed procurement actions shall
follow a procedure to aaure the avoidance
of purcheslng iiiiin» J or duplicative
Items. Where appropriate, an analysis shall
be made of lease and purchase, alternatives
to determine which would be the mast
economical, practical procurement.
(2)	Solicitations for goods and services
shall be baaed upon a clear and accurate
description of the fenhnlral requirements
fcr the material, product or semes to be
procured. Such a ill si ilpnnn shall not. In
competitive procurements, contain features
which unduly restrict competition. -Brand
name or equal** descriptions may be used
as a means to «*»*«»» the performance or
other salient requirement* of a procurement,
and when so used the specific features of the
named brand which must be met toy bidden /
offerers shall be dearly specified.
(3)	Positive efforts shall be made by the
recipients to utilise small business and mi-
nority-owned business sources of supplies
and services. Such eflorts should allow these
sources the maximum feasible opportunity
to compete for contracts utilizing Federal
funds.
(4)	The type of procuring lostrumrnts
used. e.g„ fixed prtce contracts, coat reus-
-------
Office of Management and Budget Circular A-110 (7/30/76)
bursable contracts, purc.laj* orders, incen-
tive comnca. snail be determined by the
recipient but must be appropriate tor the
particular procurement and for promoting
the best Interest of the program involved.
The "cost-plus-a-percentage-of-cost" meth-
od of contracting shall not be used.
(Si Contracts sbal be made only with re-
sponsible contractors who possess the po-
te.-.tioaal ability to perform successfully
unaer the terms md conditions of a pro-
posed procurement. Consideration shall be
giver, to such matters as contractor integrity,
record of past performance, financial and
technical resources or accesiblllty to other
necessary resources.
(6)	All proposed sole source contract! or
where only one bid or proposal la received
Is whlah the aggregate expenditure 1j ex-
pected to exceed 05.000 shall be subject to
prior approval at the discretion of the Fed-
eral sponsoring agency.
(7)	Same form of pnee or cost analysis
should be made In connection with every
procurement action. Price analysis may be
accomplished in various ways. Including the
comparison of price quotations submitted,
market prtces and similar indicia, together
with discounts. Cost analysis is the review
and evaluation of each element of cost to
determine reasonableness, allocablllty and
allowability
(8)	Procurement records and flies for pur-
chases In excess of *10,000 shall include the
following •
(a)	Basis for oontractor selection:
(b)	Justification for lack of competition
when competitive bids or offers are not
obtained.:
(c)	Basis for award cost or price
(9)	A system for contract administration
shall be maintained to ensure contractor
conformance with terms, conditions and
spec Locations of the contract, and to ensure
adequate and timely failowup at all pur-
chases.
4. The recipient shall Include, In addition
to provisions to define a sound and complete
agreement, the following provisions In all
contracts. These provisions shall also be ap-
plied to suboontrocb.
a.	Contracts in excess of (10.000 shall con-
tain contractual provisions or conditions
that wtll allow for administrative, contrac-
tual or legal remedies in instances In which
contractors violate or breach contract terms,
and provide for such remedial actions as
may be appropriate.
b.	All oontracts in excess of (10.000 shall
oonoaln suitable provmons for termination
by the recipient including the manner by
which termination wtll be effected and the
basts for settlement. In addition, such con-
tracts shall describe conditions under which
the contract may be terminated for default
oi well as oondltlons where the contract may
be terminated because of olrcujnst&nces be-
yond the control of the contractor.
c.	In ail contracts for construction or fa-
cility Improvement awarded for more than
SI00,000. recipients shall observe the bond-
ing requirements provided In Attachment B
to this circular.
d.	All contracts awarded by recipients and
their contractors 'or subgmntees having a
value of more than (10.000. shall contain a
provision requiring compliance with Execu-
tive Order 11246, entitled "Equal Employ-
ment Opportunity." as amended by Executive
Order 11375. and as supplemented in Depart-
ment of Labor regulations (41 CFR, Part SO).
e.	All contracts and subgrants In excess of
•2.000 for construction or repair awarded by
recipients and subreelplents shall include a
provision for compliance with the Copeland
"Anti-Kick Back" Act (IB U.S.C. 874) as
supplemented in Department of Labor
regulations (29 CFR. Part 3). This Act pro-
vides that each contractor or subgrantee
shall be prohibited from inducing, by any
means, any person employed In the construc-
tion. completion, or repair of public work, to
give up any part of the compensation to
which he Is otherwise entitled. The recipient
shall report all suspected or reported viola-
tions to the Federal sponsoring agency.
f.	When required by the Federal program
legislation. all construction contracts
awarded by the recipients and subreelplents
of more than (2.000 shall include a provision
for compliance with the Davis-Bacon Act (40
U.S.C. 276a to a-7) and as supplemented by
Department of Labor regulations (29 CFR.
Part S). Under this Act contractors shall be
required to pay wages to laborers and me-
chanics at a rate not less than the minimum
wages specified in a wage determination made
by '2 times the basic
rate of pay for all hours worked in' excess
of 8 hours in any calendar day or 40 hours
in the workweek. Section 107 of the Ac: is
applicable to construction work and provides
that no laborer or mechantc shall be required
to work: In'surroundings or under working
conditions-which are unsanitary, hazardous
or dangerous to his health and safety ss de-
termined under construction safety and
health standards promulgated by the Secre-
tary of Labor. These requirements do not
apply to the purchases of supplies or mate-
rials or articles ordinarily available on the
open market, or contracts for transportation
or transmission of intelligence
h. Contracts or agreements, the principal
purpose of which is to create, develop or im-
prove products, processes or methods: or for
exploration into fields that directly concern
public health, safety or welfare: or contracts
in the field of science or technology in uhlch
there has been little stgnlflcant experience
outside of work funded by Federal assist-
ance. shall contain a notice to the effect that
matters regarding rights to Inventions and
materials generated under the contract or
agreement are subject to the regulations is-
sued by the Federal sponsoring agency and
the recipient. The contractor shall be ad-
vised as to the source of additional Informa-
tion regarding these matters.
1. All negotiated contracts (except those
of (10.000 or less) awarded by recipients
shall Include a provision to the effect that
the recipient, the Federal sponsoring agency,
the Comptroller Oeneral of the United States,
or any of their duly authorized representa-
tives. shall have access to any books, docu-
ments. papers and records of the contractor
which are directly pertinent to a specific pro-
gram for the purpose of making audits,
examinations, excerpts and transcriptions.
J. Contracts and subgrants of amounts in
excess of (100.000 shall contain a provision
that requires the recipient to agree to com-
ply with all applicable standards, orders or
regulations issued pursuant to the Clear Air
Act of 1970 ( 42 U.S.C. 1857 et seq.) and the
Federal Water Pollution Control Act (33
U.S.C. 1251 et seq.) as amended. Violations
shall be reported to the Federal sponsoring
agency and the Regional Office of the En-
vironmental Protection Agency.
(PRDoc.76-21904 Filed 7-29-76:8:45 am]
-------
7
-------
Wednesday
January 28, 1981
Part X
Office of
Management and
Budget	
Cost Principles for State and Local
Governments
-------
9548
Federal Register / Vol. 46. No. 18 / Wednesday, January 28. 1981 / -Notices
OFFICE OF MANAGEMENT AND
BUDGET
Cost Principles (or State and Local
Governments
AGENCY: Office of Management and
Budget.
action: Final policy.
summary: This notice advises that
Federal Management Circular 74-4
(Revised), dated July 18,1974, is
reissued under its original designation of
Office of Management and Budget
Circular No. A-87. No substantive
changes are made in the Circular. The
Circular is set forth below in its entirety.
effective oate: The revision was
effective January IS. 1981.
FOR FURTHER INFORMATION CONTACT:
Palmer Marcantonio. Deputy Chief,
Financial Management Branch. Budget
Review Division. 6002 New Executive
Office Building. Washington. D.C. 20503.
202/395-4773.
TO OBTAIN SINGLE COPIES OF THE
circular, contact: Document
Distribution Center. Office of
Administration. G-236 New Executive
Office Building. Washington. D.C. 20503.
TO OBTAIN MULTIPLE COPIES, CONTACT
Superintendent of Documents, U.S.
Government Printing Office,
Washington. D.C. 20402.
Daniel F. Mann.
Budget and Management Officer.
January IS. 1981.
To: The Heads of Executive Departments and
Establishments.
Subject: Cost principles for State and local
governments.
1.	Purpose. This Circular establishes
principles and standards for determining
costs applicable to grants, contracts, and
other agreements with State and local
governments and federally-recognized Indian
tribal governments.
2.	Supersession. This Circular supersedes
Federal Management Circular 74-4 as
revised. The Circular is reissued under its
onginal designation of OMB Circular A-87.
3.	Summary of changes. No substantive
changes are made in the Circular.
4.	Policy intent. This Circular provides
principles for determining the allowable costs
of programs administered by State, local, and
federally-recognized Indian tribal
governments under grants from and contracts
with the Federal Government. They are
designed to provide the basis for a uniform
approach to the problem of determining costs
and to promote efficiency and better
relationships between grantees and the
Federal Government. The principles are for
determining costs only and are not intended
to identify the circumstances nor to dictate
the extent of Federal and State or local
participation in the financing of a particular
project. They are designed to provide that
federally-assisted programs bear their fair
share of costs recognized under these
principles except where restricted or
prohibited by law. No provision for profit or
other increment above cost is intended.
5. Applicability and scope.
a.	The provisions of this Circular apply to
all Federal agencies responsible for
administering programs that involve grants
and contracts with State, local, and federally-
recognized Indian tribal governments.
b.	Its provisions do not apply to grants and
contracts with:
(1)	Publicly-financed educational
institutions subject to Office of Management
and Budget Circular A-21. and
(2)	Publicly owned hospitals and other
providers of medical care subject to
requirements promulgated by the sponsoring
Federal agencies.
Any other exceptions will be approved by
the Office of Management and Budget in
particular cases where adequate justification
is presented.
8. Attachments. The principles and related
policy guides are set fortti in the attachments,
which are:
Attachment A—Principles for determining
costs applicable to grants and contracts
with State, local, and federally-recognized
Indian tribal governments.
Attachment B—Standards for selected items
of cost
7.	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.
James T. Mclntyre. Jr.
Director.
[Circular No. A-87]
Attachment A—Principles for
Determining Costs Applicable to Grants
and Contracts With State, Local, and
Federally Recognized Indian Tribal
Governments
TABLE OF CONTENTS
A Purpose and scope
1.	Objectives
2.	Policy guides
3.	Application
B.	Definitions
1.	Approval or authorization of the grantor
Federal agency
2.	Cost allocation plan
3.	Cost
4.	Cost objective
5.	Federal agency
8.	Federally-recognized Indian tribal
governments
7.	Grant
8.	Grant program
9.	Grantee
10.	Local unit
11.	Other State or local agencies
12.	Services
13.	Supporting services
C.	Basic guidelines
1.	Factors affecting allowability of costs
2.	Allocable costs
3.	Applicable credits
D.	Composition of cost
1. Total cost
2. Classification of costs
E.	Direct costs
1.	General
2.	Application
F.	Indirect costs
1.	General
2.	Grantee departmental indirect costs
3.	Limitation on indirect costs
G.	Cost incurred by agencies other than the
grantee
1.	General
2.	Alternative methods of determining
indirect cost
H.	Cost incurred by grantee department for
others
1. General
J. Cost allocation plan
1.	General
2.	Requirements
3.	Instructions for preparation of cost
allocation plans
4.	Negotiation and approval of indirect cost
proposals for States
5.	Negotiation and approval of indirect cost
proposals for local governments
8. Negotiation and approval of indirect cost
proposals for federally-recognized Indian
tribal governments
7. Resolution of problems
A. Purpose and scope.
1.	Objectives. This Attachment sets
forth principles for determining the
allowable costs of programs
administered by State, local, and
federally-recognized Indian tribal
governments under grants from and
contracts with the Federal Government.
The principles are for the purpose of
cost determination and are not intended
to identify the circumstances or dictate
the extent of Federal and State or local
participation in the financing of a
particular grant. They are designed to
provide that federally-assisted programs
bear their fair share of costs recognized
under these principles, except where
restricted or prohibited by law. No
provision for profit or other increment
above cost is intended.
2.	Policy guides. The application of
these principles is based on the
fundamental premises that:
a.	State, local, and federally
recognized Indian tribal governments
are responsible for the efficient and
effective administration of grant and
contract programs through the
application of sound management
practices.
b.	The grantee or contractor assumes
the responsibility for seeing that
federally-assisted program funds have
been expended and accounted for
consistent with underlying agreements
and program objectives.
c.	Each grantee or contractor
organization, in recognition of its own
unique combination of staff facilities
and experience, will have the primary
responsibility for employing whatever
form of organization and management
-------
Federal Register / Vol. 46, No. 18 / Wednesday, January 28, 1981 / Notices
9549
techniques may be necessary to assure
proper and efficient administration.
3. Application. These principles will
be applied by all Federal agencies in
determining costs incurred by State,
local, and federally recognized Indian
tribal governments under Federal grants
and cost reimbursement type contracts
(including subgrants and subcontracts)
except those with (a) publicly-financed
educational institutions subject to Office
of Management and Budget Circular A-
21, and (b) publicly-owned hospitals and
other providers of medical care subject
to requirements promulgated by the
sponsoring Federal agencies.
B. Definitions.
1.	Approval or authorization of the
grantor Federal agency means
documentation evidencing consent prior
to incurring specific cost.
2.	Cost allocation plan means the
documentation identifying,
accumulating, and distributing
allowable costs under grants and
contracts together with the allocation
methods used.
3.	Cost, as used herein, means cost as
determined on a cash, accrual, or other
basis acceptable to the Federal grantor
agency as a discharge of the grantee's
accountability for Federal funds.
4.	Cost objective means a pool, center,
or area established for the accumulation
of cost. Such areas include
organizational units, functions, objects
or items of expense, as well as ultimate
cost objectives including specific grants,
projects, contracts, and other activities.
5.	Federal agency means any
department, agency, commission, or
instrumentality in the executive branch
of the Federal Government which makes
grants to or contracts with State, local,
or federally-recognized Indian tribal
governments.
6.	Federally-recognized Indian tribal
governments means the governing body
or a governmental agency of any Indian
tribe, band, nation, or other organized
group or community (including any
native village as defined in Section 3 of
the Alaska Native Claims Settlement
Act, 85 Stat. 686) certified by the
Secretary of the Interior as eligible for
the special programs and services
provided by him through the Bureau of
Indian Affairs.
7.	Grant means an agreement between
the Federal Government and a State,
local, or federally-recognized Indian
tribal government whereby the Federal
Government provides funds or aid in
kind to carry out specified programs,
services, or activities. The principles
and policies stated in this Circular as
applicable to grants in general also
apply to any federally-sponsored cost
reimbursement-type of agreement
performed by a State, local, or federally-
recognized Indian tribal government.
8.	Grant program means those
activities and operations of the grantee
which are necessary to carry out the
purposes of the grant, including any
portion of the program financed by the
grantee.
9.	Grantee means the department or
agency of State, local, or federally
recognized Indian tribal government
which is responsible for administration
of the grant.
10.	Local unit means any political
subdivision of government below the
State level.
11.	Other State or local agencies
means department or agencies of the
State or local unit which provide goods,
facilities, and services to a grantee.
12.	Services, as used herein, means
goods and facilities, as well as services.
13.	Supporting services means
auxiliary functions necessary to sustain
the direct effort involved in
administering a grant program or an
activity providing service to the grant
program. These services may be
centralized in the grantee department or
in some other agency, and inlcude
procurement, payroll, personnel
functions, maintenance and operation of
space, data processing, accounting,
budgeting, auditing, mail and messenger
service, and the like.
C. Basic guidelines.
1. Factors affecting allowability of
costs. To allowable under a grant
program, costs must meet the following
general criteria:
a.	Be necessary and reasonable for
proper and efficient administration of
the grant programs, be allocable thereto
under these principles, and except as
specifically provided herein, not be a
general expense required to carry out
the overall responsibilities of State,
local or federally-recognized Indian
tribal governments.
b.	Be authorized or not prohibited
under State or local laws or regulations.
c.	Conform to any limitations or
exclusions set forth in these principles.
Federal laws, or other governing
limitations as to types or amounts of
cost items.
d.	Be consistent with policies,
regulations, and procedures that apply
uniformly to both federally assisted and
other activities of the unit of government
of which the grantee is a part.
e.	Be accorded consistent treatment
through application of generally
accepted accounting principles
appropriate to the circumstances.
f.	Not be allocable to or included as a
cost of any other federally financed
program in either the current or a prior
period.
g. Be net of all applicable credits.
2.	Allocable costs.
a.	A cost is allocable to a particular
cost objective to the extent of benefits
received by such objective.
b.	Any cost allocable to a particular
grant or cost objective under the
principles provided for in this Circular
may not be shifted to other Federal
grant programs to overcome fund
deficiencies, avoid restrictions imposed
by law or grant agreements, or for other
reasons.
c.	Where an allocation of joint cost
will ultimately result in charges to a
grant program, an allocation plan will be
required as prescribed in Section).
3.	Applicable credits.
a.	Applicable credits refer to those
receipts or reduction of expenditure-
type transactions which offset or reduce
expense items allocable to grants as
direct or indirect costs. Examples of
such transactions are: purchase
discounts; rebates or allowances,
recoveries or indeminties on losses; sale
of publications, equipment, and scrap;
income from personal or incidental
services; and adjustments of
overpayments or erroneous charges.
b.	Applicable credits may also arise
when Federal funds are received or are
available from sources other than the
grant program involved to finance
operations or capital items of the
grantee. This includes costs arising from
the use or depreciation of items donated
or financed by the Federal Government
to fulfill matching requirments under
another grant program. These types of
credits should likewise be used to
reduce related expenditures in
determining the rates or amounts
applicable to a given grant.
D.	Composition of Cost
1.	Total cost. The total cost of a grant
program is comprised of the allowable
direct cost incident to its performance,
plus its allocable portion of allowable
indirect costs, less applicable credits.
2.	Classification of costs. There is no
universal rule for classifying certain
costs as either direct or indirect under
every accounting system. A cost may be
direct with respect to some specific
service or function, but indirect with
respect to the grant or other ultimate
cost objective. It is essential, therefore,
that each item of cost be treated
consistently either as a direct or an
indirect cost. Specific guides for
determining direct and indirect costs
allocable under grant programs are
provided in the sections which follow:
E.	Direct Costs
1. General. Direct costs are those that
can be identified specifically with a
-------
9550
Federal Register / Vol. 46. No. 18 / Wednesday, January 28, 1981 / Notices
particular cost objective. These costs
may be charged directly to grants,
contracts, or to other programs against
which costs are finally lodged. Direct
costs may also be charged to cost
objectives used for the accumulation of
costs pending distribution in due course
to grants and other ultimate cost
objectives.
2. Application. Typical direct costs
chargeable to grant programs are:
a.	Compensation of employees for the
time and efforts devoted specifically to
the execution of grant programs.
b.	Cost of materials acquired,
consumed, or expended specifically for
the purpose of the grant.
c.	Equipment and other approved
capital expenditures.
d.	Other items of expense incurred
specifically to carry out the grant
agreement.
e.	Services furnished specifically for
the grant program by other agencies,
provided such charges are consistent
with criteria outlined in Section G of
these principles.
F. Indirect Costs
1.	General. Indirect costs are those (a)
incurred for a common or joint purpose
benefiting more than one cost objective,
and (b) not readily assignable to the cost
objectives specifically benefited,
without effort disproportionate to the
results achieved. The term "indirect
costs." as used herein, applies to costs
of this type originating in the grantee
department, as well as those incurred by
other departments in supplying goods,
services, and facilities, to the grantee
department. To facilitate equitable
distribution of indirect expenses to the
cost objectives served, it may be
necessary to establish a number of pools
of indirect cost within a grantee
department or in other agencies
providing services to a grantee
department. Indirect cost pools should
be distributed to benefiting cost
objectives on bases which will produce
an equitable result in consideration of
relative benefits derived.
2.	Grantee departmental indirect
costs. All grantee departmental indirect
costs, including the various levels of
supervision, are eligible for allocation to
grant programs provided they meet the
conditions set forth in this Circular. In
lieu of determining the actual amount of
grantee departmental indirect cost
allocable to a grant program, the
following methods may be used.
a. Predetermined fixed rates for
indirect costs. A predetermined fixed
rate for computing indirect costs
applicable to a grant may be negotiated
annually in situations where the cost
expenence and other pertinent facts
available are deemed sufficient to
enable the contracting parties to reach
an informed judgment (1) as to the
probable level of indirect costs in the
grantee department during the period to
be covered by the negotiated rate, and
(2) that the amount allowable under the
predetermined rate would not exceed
actual indirect cost.
b. Negotiated lump sum for overhead.
A negotiated fixed amount in lieu of
indirect costs may be appropriate under
circumstances where the benefits
derived from a grantee department's
indirect services cannot be readily
determined as in the case of small, self-
contained or isolated activity. When this
method is used, a determination should
be made that the amount negotiated will
be approximately the same as the actual
indirect cost that may be incurred. Such
amounts negotiated in lieu of indirect
costs will be treated as an offset to total
indirect expenses of the grantee
department before allocation to
remaining activities. The base on which
such remaining expenses are allocated
should be appropriately adjusted.
3. Limitation on indirect costs.
a.	Federal grants may be subject to
laws that limit the amount of indirect
costs that may be allowed. Agencies
that sponsor grants of this type will
establish procedures which will assure
that the amount actually allowed for
indirect costs under each such grant
does not exceed the maximum
allowable under the statutory limitation
or the amount otherwise allowable
under this Circular, whichever is the
smaller.
b.	When the amount allowable under
a statutory limitation is less than the
amount otherwise allocable as indirect
costs under this Circular, the amount not
recoverable as indirect costs under a
grant not be shifted to another federally-
sponsored grant program or contract.
G. Cost Incurred by Agencies Other
Than the Grantee
1. General. The cost of service
provided by other agencies may only
include allowable direct costs of the
service plus a pro rata share of
allowable supporting costs (Section
B.12.) and supervision directly required
in performing the service, but not
supervision of a general nature such as
that provided by the head of a
department and his staff assistants not
directly involved in operations.
However, supervision by the head of a
department or agency whose sole
function is providing the service
furnished would be an eligible cost.
Supporting costs include those furnished
by other units of the supplying
department or by other agencies.
2. Alternative methods of determining
indirect cost In lieu of determining
actual indirect cost related to a
particular service furnished by another
agency, either of the following
alternative methods may be used
provided only one method is used for a
specific service during the fiscal year
involved.
a.	Standard indirect rate. An amount
equal to ten percent of direct labor cost
in providing the service performed by
another State agency (excluding
overtime, shift, or holiday premiums and
fringe benefits) may be allowed in lieu
of actual allowable indirect cost for that
service.
b.	Predetermined fixed rate. A
predetermined fixed rate for indirect
cost of the unit or activity providing
service may be negotiated as set forth in
Section F.2.a.
H. Cost Incurred by Grantee
Department for Others
1. General. The principles provided in
Section G will also be used in
determining the cost of services
provided by the grantee department to
another agency.
/. Cost Allocation Plan
1.	General. A plan for allocation of
costs will be required to support the
distribution of any joint costs related to
the grant program. All costs included in
the plan will be supported by formal
accounting records which will
substantiate the propriety of eventual
charges.
2.	Requirements. The allocation plan
of the grantee department should cover
all joint costs of the department as well
as costs to be allocated under plans of
other agencies or organizational units
which are to be included in the costs of
federally-sponsored programs. The cost
allocation plans of all the agencies
rendering services to the grantee
department, to the extent feasible,
should be presented in a single
document. The allocation plan should
contain, but not necessarily be limited
to, the following:
a.	The nature and extent of services
provided and their relevance to the
federally-sponsored programs.
b.	The items of expense to be
included.
c.	The methods to be used in
distributing cost.
3.	Instructions for preparation of cost
allocation plans. The Department of
Health and Human Services in
consultation with the other Federal
agencies concerned, will be responsible
for developing and issuing the
instructions for use by grantees in
preparation of cost allocation plans.
-------
Federal Register / Vol. 46. No. 18 / Wednesday, January 26, 1981 / Notices
9551
This responsibility applies to both
central support services at the State,
local, and Indian tribal level and
indirect cost proposals of individual
grantee departments.
4.	Negotiation and approval of
indirect cost proposals for States.
a.	The Department of Health and
Human Services, in collaboration with
the other Federal agencies concerned,
will be responsible for negotiation,
approval, and audit of cost allocation
plans, which will be submitted to it by
the States. These plans will cover
central support service cftsts of the
State.
b.	At the grantee department level in a
State, a single cognizant Federal agency
will have responsibility similar to that
set forth in a. above, for the negotiation,
approval, and audit of the indirect cost
proposal. A current list of agency
assignments is maintained by the Office
of Management and Budget.
c.	Questions concerning the cost
allocation plans approved under a. and
b. above, should be directed to the
agency responsible for such approvals.
5.	Negotiation and approval of
indirect cost proposals for local
governments.
a.	Cost allocation plans will be
retained at the local government level
for audit by a designated Federal agency
except in those cases where that agency
requests that cost allocation plans be
submitted to it for negotiation and
approval.
b.	A list of cognizant Federal agencies
assigned responsibility for negotiation,
approval and audit of central support
service cost allocation plans at the local
government level is maintained by the
the Office of Management and Budget.
c.	At the grantee department level of
local governments, the Federal agency
with the predominant interest in the
work of the grantee department will be
responsible for necessary negotiation,
approval and audit of the indirect cost
proposal.
6.	Negotiation and approval of
indirect cost proposals for federally
recognized Indian tribal governments.
The Federal agency with the
predominant interest in the work of the
grantee department will be responsible
for necessary negotiation, approval and
audit of the indirect cost proposal.
7.	Resolution of problems. To the
extent that problems are encountered
among the Federal agencies in
connection with 4 and 5 above, the
Office of Management and Budget will
lend assistance as required.
[Circular No. A-87]
Attachment B—Standards for Selected
Items of Costs
Table of Contents
A.	Purpose and applicability
1.	Objective
2.	Application
B.	Allowable costs
1.	Accounting
2.	Advertising
3.	Advisory councils
4.	Audit service
5.	Bonding
6.	Budgeting
7.	Building lease management
8.	Central stores .
9.	Communications
10.	Compensation for personal services
11.	Depreciation and use allowances
12.	Disbursing service
13.	Employee fringe benefits
14.	Employee morale, health and welfare
costs
15.	Exhibits
16.	Legal expenses
17.	Maintenance and repair
18.	Materials and supplies
19.	Memberships, subscriptions and
professional activites
20.	Motor pools
21.	Payroll preparation
22.	Personnel administration
23.	Printing and reproduction
24.	Procurement service
25.	Taxes
28. Training and education
27.	Transportation
28.	Travel
C.	Costs allowable with approval of grantor
agency
1.	Automatic data processing
2.	Building space and related facilities
3.	Capital expenditures
4.	Insurance and indemnification
5.	Management studies
8. Preagreement costs
7.	Professional services
8.	Proposal costs
D.	Unallowable costs
1. Bad debts
2.. Contingencies
3.	Contributions and donations
4.	Entertainment
5.	Fines and penalties
8. Governor's expenses
7.	Interest and other financial costs
8.	Legislative expenses
9.	Underrecovery of costs under grant
agreements
A. Purpose and applicability.
1.	Objective. This Attachment
provides standards for determining the
allowability of selected items of cost.
2.	Application. These standards will
apply irrespective of whether a
particular item of cost is treated as
direct or indirect cost. Failure to
mention a particular item of cost in the
standards is not intended to imply that it
is either allowable or unallowable,
rather determination of allowability in
each case should be based on the
treatment of standards provided for
similar or related items of cost. The
1 allowability of the selected items of cost
is subject to the general policies and
- principles stated in Attachment A of this
Circular.
B. Allowable costs.
1.	Accounting. The cost of establishing
and maintaining accounting and other
information systems required for the
management of grant programs is
allowable. This includes costs incurred
by central service agencies for these
purposes. The cost of maintaining
central accounting records required for
overall State or Indian tribal
government purposes, such as
appropriation and fund accounts by the
Treasurer, Comptroller, or similar
officials, is considered to be a general
expense of government and is not
allowable.
2.	Advertising. Advertising media
includes newspapers, magazines, radio
and television programs, direct mail,
trade papers, and the like. The
advertising costs allowable are those
which are solely for:
a.	Recruitment of personnel required
for the grant program.
b.	solicitation of bids for the
procurement of goods and services
required.
c.	disposal of scTap or surplus
materials acquired in the performance of
the grant agreement.
d.	Other purposes specifically
provided for in the grant agreement.
3.	Advisory councils. Costs incurred
by State advisory councils or
committees established pursuant to
Federal requirements to carry out grant
programs are allowable. The cost of like
organizations is allowable when
provided for in the grant agreement.
4.	Audit service. The cost of audits
necessary for the administration and
management of functions related to
grant programs is allowable.
5.	Bonding. Costs of premiums on
bonds covering employees who handle
grantee agency funds are allowable.
6.	Budgeting. Costs incurred for the
development, preparation, presentation,
and execution of budgets are allowable.
Costs for services of a central budget
office are generally not allowable since
these are costs of general government.
However, where employees of the
central budget office actively participate
in the grantee agency's budget process,
the cost of identifiable services is
allowable.
7.	Building lease management. The
administrative cost for lease
management which includes review of
lease proposals, maintenance of a list of
available property for lease, and related
activities is allowable.
-------
9552
Federal Register / Vol. 46. No. 18 / Wednesday, January 28, 1981 / "Notices
8.	Central stores. The cost of
maintaining and operating a central
stores organization for supplies,
equipment, and materials used either
directly or indirectly for grant programs
is allowable.
9.	Communications. Communication
costs incurred for telephone calls or
service, teletype service, wide area
telephone service (WATS), centrex,
telpak (tie lines), postage, messenger
service and similar expenses are
allowable.
10.	Compensation for personal
services.
a.	General. Compensation for
personal services includes all
remuneration, paid currently or accured.
for services rendered during the period
of performance under the grant
agreement, including but not necessarily
limited to wages, salanes. and
supplementary compensation and
benefits (Section B.13.). The costs of
such compensation are allowable to the
extent that total compensation for
individual employees: (1) is reasonable
for the services rendered: (2) follows an
appointment made in accordance with
State, local, or Indian tribal government
laws and rules and which meets Federal
merit system or other requirements,
where applicable: and (3) is determined
and supported as provided in b. below.
Compensation for employees engaged in
federally-assisted activities will be
considered reasonable to the extent that
it is consistent with that paid for similar
work in other activities of the State,
local, or Indian tribal government. In
cases where the kinds of employees
required for the federally-assisted
activities are not found in the other
activities of the State, local, or Indian
tribal government, compensation will be
considered reasonable to the extent that
it is comparable to that paid for similar
work in the labor market in which the
employing government competes for the
kind of employees involved.
Compensation surveys providing data
representative of the labor market
involved will be an acceptable basis for
evaluating reasonableness.
b.	Payroll and distribution of time.
Amounts charged to grant programs for
personal services, regardless of whether
treated as direct or indirect costs, will
be based on payrolls documented and
provided in accordance with generally
accepted practice of the State, local, or
Indian tribal government. Payrolls must
be supported by time and attendance or
equivalent records for individual
employees. Salanes and wages of
employees chargeable to more than one
grant program or other cost objective
will be supported by appropriate time
distribution records. The method used
should produce an equitable distribution
of time and effort.
11. Depreciation and use allowances.
a.	Grantees may be compensated for
the use of buildings, capital
. improvements, and equipment through
use allowances or depreciation. Use
allowances are the means of providing
compensation in lieu of depreciation or
other equivalent costs. However, a
combination of the two methods may
not be used in connection with a single
class of fixed assets.
b.	The computation of depreciation or
use allowance will be based on
acquisition cost. Where actual cost
records have not been maintained, a
reasonable estimate of the original
acquisition cost may be used in the
computation. The computation will
exclude the cost or any portion of the
cost of buildings and equipment donated
or bome directly or indirectly by the
Federal Government through charges to
Federal grant propgrams or otherwise,
irrespective of where title was originally
vested or where it presently resides. In
addition, the computation will also
exclude the cost of land. Depreciation or
a use allowance on idle or excess
facilities is not allowable, except when
specifically authorized by the grantor
Federal agency.
c.	Where the depreciation method is
followed, adequate property records
must be maintained, and any generally-
accepted method of computing
depreciation may be used. However, the
method of computing depreciation must
be consistently applied for any specific
asset or class of assets for all affected
federally-sponsored programs and must
result in equitable charges considering
the extent of the use of the assets for the
benefit of such programs.
d.	In lieu of depreciation, a use
allowance for buildings and
improvements may be computed at an
annual rate not exceeding two percent
of acquisition cost. The use allowance
for equipment (excluding items properly
capitalized as building cost) will be
computed at an annual rate not
exceeding six and two-thirds percent of
acquisition cost of usuable equipment.
e.	No depreciation or use charge may
be allowed on any assets that would be
considered as fully depreciated,
provided, however, that reasonable use
charges may be negotiated for any such
assets if warranted after taking into
consideration the cost of the facility or
item involved, the estimated useful life
remaining at time of negotiation, the
effect of any increased maintenance
charges or decreased efficiency due to
age. and any other factors pertinent to
the utilization of the facility or item for
the purpose contemplated.
12.	Disbursing service. The cost of
disbursing grant program funds by the
Treasurer or other designated officer is
allowable. Disbursing services cover the
processing of checks or warrants, from
preparation to redemption, including the
necessary records of accountability and
reconciliation of such records with
related cash accounts.
13.	Employee fringe benefits. Costs
identified under a. and b. below are
allowable to the extent that total
compensation for employees is
reasonable as defined in Section B.10.
a.	Employee benefits in the form of
regular compensation paid to employees
during periods of authorized absences
from the job. such as for annual leave,
sick leave, court leave, military leave,
and the like, if they are: (1) provided
prusuant to an approved leave system:
and (2) the cost thereof is equitably
allocated to all related activities,
including grant programs.
b.	Employee benefits in the form of
employers' contribution or expenses for
social security, employees' life and
health insurance plans, unemployment
insurance coverage, workmen's
compensation insurance, pension plans,
severance pay. and the like, provided
such benefits are granted under
approved plans and are distributed
equitably to grant programs and to other
activities.
14.	Employee morale, health and
welfare costs. The costs of health or
first-aid clinics and/or infirmaries,
recreational facilities, employees'
counseling services, employee
information publications, and any
related expenses incurred in accordance
with general State, local or Indian tribal
policy, are allowable. Income generated
from any of these activities will be
offset against expenses.
15.	Exhibits. Costs of exhibits relating
specifically to the grant programs are
allowable.
16.	Legal expenses. The cost of legal
expenses required in the administration
of grant programs is allowable. Legal
services furnished by the chief legal
officer of a State, local or Indian tribal
government or his staff solely for the
purpose of discharging his general
responsibilities as legal officer are
unallowable. Legal expenses for the
prosecution of claims against the
Federal Government are unallowable.
17.	Maintenance and repair. Costs
incurred for necessary maintenance,
repair, or upkeep of property 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.
18.	Materials and supplies. The cost of
materials and supplies necessary to
-------
Federal Register / Vol. 46. No. 18 / Wednesday, January 28, 1981 / Notices
9553
carry out the grant programs is
allowable. Purchases made specifically
for the grant program should be charged
thereto at their actual prices after
deducting all cash discounts, trade
discounts, rebates, and allowances
received by the grantee. Withdrawals
from general stores or stockrooms
should be charged at cost under any
recognized method of pricing
consistently applied. Incoming
transportation charges are a proper part
of material cost.
19.	Memberships, subscriptions and
professional activities.
a.	Memberships. The cost of
membership in civic, business, technical
and professional organizations is
allowable provided: (1) the benefit from
the membership is related to the grant
program; (2) the expenditure is for
agency membership: (3) the cost of the
membership is reasonably related to the
value of the services or benefits
received; and (4) the expenditure is not
for membership in an organization
which devotes a substantial part of its
activities to influencing legislation.
b.	Reference material The cost of
books, and subscriptions to civic,
business, professional, and technical
periodicals is allowable when related to
the grant program.
c.	Meetings and conferences. Costs
are allowable when the primary purpose
of the meeting is the dissemination of
technical information relating to the
grant program and they are consistent
with regular practices followed for other
activities of the grantee.
20.	Motor pools. The costs of a service
organization which provides
automobiles to user grantee agencies at
a mileage or fixed rate and/or provides
vehicle maintenance, inspection and
repair services are allowable.
21.	Payroll preparation. The cost of
preparing payrolls and maintaining
necessary related wage records is
allowable.
22.	Personnel administration. Costs
for the recruitment, examination,
certification, classification, training,
establishment of pay standards, and
related activities for grant programs, are
allowable.
23.	Printing and reproduction. Costs
for printing and reproduction services
necessary for grant administration,
including but not limited to forms,
reports, manuals, and informational
literature, are allowable. Publication
costs of reports or other media relating
to grant program accomplishments or
results are allowable when provided for
in the grant agreement.
24.	Procurement service. The cost of
procurement service, including
solicitation of bids, preparation and
award of contracts, and all phases of
contract administration in providing
goods, facilities and services for grant
programs, is allowable.
25.	Taxes. In general, taxes or
payments in lieu of taxes which the
grantee agency is legally required to pay
are allowable.
26.	Training and education. The cost
of in-service training, customarily
provided for employee development,
which directly or indirectly benefits
grant programs is allowable. Out-of-
service training involving extended
periods of time is allowable only when
specifically authorized by the grantor
agency.
27.	Transportation. Costs incurred for
freight, cartage, express, postage and
other transportation costs relating either
to goods purchased, delivered, or moved
from one location to another are
allowable.
28.	Travel. Travel costs are allowable
for expenses for transportation, lodging,
subsistence, and related items incurred
by employees who are in travel status
on official business incident to a grant
program. Such costs may be charged on
an actual basis, on a per diem or
mileage basis in lieu of actual costs
incurred, or on a combination of the
two, provided the method used is
applied to an entire trip, and results in
charges consistent with those normally
allowed in like circumstances in non-
federally sponsored activities. The
difference in cost between first-class air
accommodations and less-than-first-
class air accommodations are not is
unallowable except when less-than-
first-class air accommodations
reasonably available. Notwithstanding
the provisions of paragraphs D.6. and 8.,
travel costs of officials covered by those
paragraphs, when specifically related to
grant programs, are allowable with the
prior approval of a grantor agency.
C. Costs Allowable With Approval of
Grantor Agency
1.	Automatic data processing. The
cost of data processing services to grant
programs is allowable. This cost may
include rental of equipment or
depreciation on grantee-owned
equipment. The acquisition of
equipment, whether by outright
purchase, rental-purchase agreement or
other method of purchase, is allowable
only upon specific prior approval of the
grantor Federal agency as provided
under the selected item for capital
expenditures. .
2.	Building space and related
facilities. The cost of space m privately
or publicly owned buildings used for the
benefit of the grant program is allowable
subject to the conditions stated below.
The total cost of space, whether in a
privately or publicly owned building,
may not exceed the rental cost of
comparable space and facilities in a
privately-owned building in the same
locality. The cost of space procured for
grant program usage may not be charged
to the program for periods of
nonoccupancy, without authorization of
the grantor Federal agency.
a.	Rental cost The rental cost of
space in a privately-owned building is
allowable. Similar costs for publicly
owned buildings newly occupied on or
after October 1.1980, are allowable
where "rental rate" systems, or
equivalent systems that adequately
reflect actual costs, are employed. Such
charges must be determined on the basis
of actual cost (including depreciation
based on the useful life of the building,
interest paid or accrued, operation and
maintenance, and other allowable
costs). Where these costs are included
in rental charges, they may not be
charged elsewhere. No costs will be
included for purchases or construction
that were originally financed by the
Federal Government.
b.	Maintenance and operation. The
cost of utilities, insurance, security,
janitorial services, elevator service,
upkeep of grounds, normal repairs and
alterations and the like, are allowable to
the extent they are not otherwise
included in rental or other charges for
space.
c.	Rearrangements and alterations.
Costs incurred for rearrangement and
alteration of facilities required
specifically for the grant program or
those that materially increase the value
or useful life of the facilities (Section
C.3.) are allowable when specifically
approved by the grantor agency.
d.	Depreciation and just allowances
on publicly-owned buildings. The costs
are allowable as provided in Section
B.11.
e.	Occupancy of space under rental-
purchase or a lease with option-to-
purchase agreement. The cost of space
procured under such arrangements is
allowable when specifically approved
by the Federal grantor agency.
3. Captial expenditures. The cost of
facilities, equipment, other capital
assets, and repairs which materially
increase the value or useful life of
capital assets is allowable when such
procurement is specifically approved by
the Federal grantor agency. When assets
acquired with Federal grant funds are
(a) sold; (b) no longer available for use
in a federally-sponsored program: or (c)
used for purposes not authorized by the
grantor agency, the Federal grantor
agency's equity in the asset will be
refunded in the.same proportion as
-------
9554
Federal Register / Vol. 46, No. 16 / Wednesday, January 28,1981 / Notices
Federal participation in its cost. In case
any assets are traded on new items,
only the net cost of the newly-acquired
assets is allowable.
4.	Insurance and indemnification.
a.	Costs of insurance required, or
approved and maintained pursuant to
the grant agreement, are allowable.
b.	Costs of other insurance in
connection with the general conduct of
activities are allowable subject to the
following limitations:
(1)	types and extent and cost of
coverage will be in accordance with
general State or local government policy
and sound business practice.
(2)	Costs of insurance or of
contributions to any reserve covering
the risk of loss of. or damage to. Federal
Government property are unallowable
except to the extent that the grantor
agency has specifically required or
approved such costs.
c.	Contributions to a reserve for a self-
insurance program approved by the
Federal grantor agency are allowable to
the extent that the type of coverage,
extent of coverage, and the rates and
premiums would have been allowed had
insurance been purchased to cover the
risks.
d.	Actual losses which could have
been covered by permissible insurance
(through an approved self-insurance
program or otherwise) are unallowable
unless expressly provided for in the
grant agreement. However, costs
incurred because of losses not covered
under nominal deductible insurance
coverage provided in keeping with
sound management practice, and minor
losses not covered by insurance, such as
spoilage, breakage and disappearance of
small hand tools which occur in the
ordinary course of operations, are
allowable.
e.	Indemnification. Includes securing
the grantee against liabilities to third
persons and other losses not
compensated by insurance or otherwise.
The Government is obligated to
indemnify the grantee only to the extent
expressly provided for in the grant
agreement, except as provided in d.
above.
5.	Management studies. The cost of
management studies to improve the
effectiveness and efficiency of grant
management for ongoing programs is
allowable except that the cost of studies
performed by agencies other than the
grantee department or outside
consultants is allowable only when
authorized by the Federal grantor
agency.
6.	Preagreement costs. Costs incurred
prior to the effective date of the grant or
contract, whether or not they would
have been allowable thereunder if
incurred after such date, are allowable
when specifically provided for in the
grant agreement.
7.	Professional services. Costs of
professional services rendered by
individuals or organizations not a part
of the grantee department are allowable
subject to such prior authorization as
may be required by the Federal grantor
agency.
8.	Proposal costs. Costs of preparing
proposals on potential Federal
Government grant agreements are
allowable when specifically provided
for.in the grant agreement.
D. Unallowable Costs
1.	Bad debts. Any losses arising from
uncollectible accounts and other claims,
and related costs, are unallowable.
2.	Contingencies. Contributions to a
contingency reserve or any similar
provision for unforeseen events are
unallowable.
3.	Contributions and donations.
Unallowable.
4.	Entertainment. Costs of
amusements, social activities, and
incidental costs relating thereto, such as
meals, beverages, lodgings, rentals,
transportation, and gratuities, are
unallowable.
5.	Fines and penalties. Costs resulting
from violations of. or failure to comply
with Federal. State and local laws and
regulations are unallowable.
6.	Governor's expenses. The salaries
and expenses of the Office of the
Governor of a State, or the chief
executive of a political subdivision, are
considered a cost of general State or
local government and are unallowable.
However, for a federally-recognized
Indian tribal government, only that
portion of the salaries and expenses of
the office of the chief executive that is a
cost of general government is
unallowable. The portion of salaries and
expenses directly attributable to
managing and operating programs by
the chief executive and his staff is
allowable. The allowable portion shall
be determined by the Federal cognizant
agency and the Indian government
representative on a reasonable basis.
7.	Interest and other financial costs.
Interest on borrowings (however
represented), bond discounts, cost of
financing and refinancing operations,
and legal and professional fees paid in
connection therewith, are unallowable
except when authorized by Federal
legislation and except as provided for in
paragraph C.2.a of this Attachment.
8.	Legislative expenses. Salaries and
other expenses of the State legislature or
similar local governmental bodies such
as county supervisors, city councils,
school boards, etc., whether incurred for
purposes of legislation or executive
direction, are unallowable.
9. Underrecovery of costs under grant
agreements. Any excess of cost over the
Federal contribution under one grant
agreement is unallowable under other
grant agreements.
(FR Doc.	FU*d 1-17-81: fc«J tm)
HUJMQ COOC S110-01-M
-------
8
-------
EXECUTIVE OFFICE OF THE PRESIDENT
OFFICE OF MANAGEMENT AND BUDGET
WASHINGTON. D.C. 20503
FEB 26 1979
CIRCULAR NO. A-21
Revised
TO THE HEADS OF EXECUTIVE DEPARTMENTS AND ESTABLISHMENTS
SUBJECT: Cost principles for educational institutions
1.	Purpose. This Circular establishes principles for
determining costs applicable to grants, contracts, and other
agreements with educational institutions. The principles
deal with the subject of cost determination, and make no
attempt to identify the circumstances or dictate the extent
of agency and institutional participation in the financing
of a particular project. The principles are designed to
provide that the Federal Government bear its fair share of
total costs, determined in accordance with generally
accepted accounting principles, except where restricted or
prohibited by law. Agencies are not expected to place
additional restrictions on individual items of cost.
Provision for profit or other increment above cost is
outside the scope of this Circular.
2.	Supersession-. The Circular supersedes Federal
Management Circular 73-8, dated December 19, 1973. FMC 73-8
is revised and reissued under its original designation of
0MB Circular No. A-21.
3.	Applicability.
a.	All Federal agencies that sponsor research and
development, training, and other work at educational
institutions shall apply the provisions of this Circular in
determining the costs incurred for such work. The
principles shall also be used as a guide in the pricing of
fixed price or lump sum agreements.
b.	In addition, Federally Funded Research and
Development Centers associated with educational institutions
shall be required to comply with the Cost Accounting
Standards, rules and regulations issued by the Cost
Accounting Standards Board, and set forth in 4 CFR Ch. Ill;
(No. A-21)
-------
2
provided that they are subject thereto under defense related
contracts.
4.	Responsibilities. The successful application of cost
accounting principles requires development of mutual
understanding between representatives of educational
institutions and of the Federal Government as to their
scope, implementation, and interpretation.
5.	Attachment. The principles and related policy guides
are set forth in the Attachment, "Principles for determining
costs applicable to grants, contracts, and other agreements
with educational institutions."
6.	Effective date. The provisions of this Circular shail
be effective October 1, 1979. The provisions shall be
implemented by institutions as of the start of their first
fiscal year beginning after that date. Earlier
implementation, or a delay in implementation of individual
provisions, is permitted by mutual agreement between an
institution and the cognizant Federal agency.
7.	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) 395-6823.
^ames T. Mclntyre, Jr. *
Director
Attachment
(No. A-21)
-------
ATTACHMENT
CIRCULAR NO. A-
PRINCIPLES FOR DETERMINING COSTS APPLICABLE TO GRANTS,
CONTRACTS, AND OTHER AGREEMENTS WITH
EDUCATIONAL INSTITUTIONS
(No. A-21)
-------
2
PRINCIPLES FOR DETERMINING COSTS APPLICABLE TO GRANTS,
CONTRACTS, AND OTHER AGREEMENTS WITH
EDUCATIONAL INSTITUTIONS
TABLE OF CONTENTS
Page
A.	PURPOSE AND SCOPE
1.	Objectives		—	1
2.	Policy guides		1
3 . Application		2
B.	DEFINITION OF TERMS
1.	Major functions of an institution				2
a.	Instruction		2
b.	Departmental research	—	2
c.	Organized research		3
d.	Other sponsored activities		—	3
e.	Other institutional activities		3
2.	Sponsored agreement		3
3.	Allocation		3
C.	BASIC CONSIDERATIONS
1.	Composition of total costs				4
2.	Factors affecting allowability of costs		4
3.	Reasonable costs		4
4.	Allocable costs		5
5.	Applicable credits		5
6.	Costs incurred by state and local governments—	s
(No. A-21)
-------
3
7. Limitations on allowance of costs		6
D.	DIRECT COSTS
1.	General		6
2.	Application to sponsored agreements—			6
E.	INDIRECT COSTS
1.	General				7
2.	Criteria for distribution		7
F.	IDENTIFICATION AND ASSIGNMENT OF INDIRECT COSTS
1.	Depreciation and use allowances		10
2.	Operation and maintenance expenses		11
3.	General administration and general expenses		12
4.	Departmental administration expenses		13
5.	Sponsored projects administration		14
6.	Library expenses		15
7.	Student administration and services		16
8.	Offset for indirect expenses otherwise provided
. for by the Government				16
G.	DETERMINATION AND APPLICATION OF INDIRECT COST RATE
OR RATES
1.	Indirect cost pools		16
2.	The distribution basis		17
3.	Negotiated lump sum for indirect costs		18
4.	Predetermined fixed rates for indirect costs		18
5.	Negotiated fixed rates and carry-forward
provisions								18
H.	SIMPLIFIED METHOD FOR SMALL INSTITUTIONS
(NO. A-21)
-------
4
1.	General	 19
2.	Simplified procedure	 19
J. GENERAL PROVISIONS FOR SELECTED ITEMS OF COST
1.
Advertising costs	
21
2.
Bad debts			
21
3 .
Civil defense costs	
21
4.
Commencement and convocation costs	
22
5.
Communication costs	
22
6.
Compensation for personal services		—
22
7.
Contingency provisions	
27
8 .
Deans of faculty and graduate schools	
27
9.
Depreciation and use allowances	
27
10.
Donated services and property	
29
11.
Employee morale, health, and welfare costs and
credits	
29
12.
Entertainment costs	
30
13.
Equipment and other capital expenditures	
30
14.
Fines and penalties	
31
15.
Fringe benefits	
31
16.
Insurance and indemnification	
32
17.
Interest, fund raising, and investment
management costst	
33
18 .
Labor relations costs	
34
19.
Losses on other sponsored agreements or
contracts	
34
20.
Maintenance and repair costs	
(No. A-21)
34
-------
21.
22
23,
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
5
34
35
35
35
35
35
36
36
37
37
37
37
38
39
39
39
40
41
41
41
41
42
42
Material costs	
Memberships, subscriptions, and professional
activity costs-—-						
Patent costs		—------—					
Plant security costs	
Preagreement costs	
Professional services costs	
Profits and los€es on disposition of plant
equipment or other capital assets	
Proposal costs---—									
Public information services costs	
Rearrangement and alteration costs	
Reconversion costs		—					
Recruiting costs	
Rental cost of buildings and equipment	
Royalties and other costs for use of patents—-
Sabbatical leave costs	
Scholarships and student aid costs	
Severance pay	
Specialized service facilities	
Special services costs	——			
Student activity costs	
Taxes	———		—
Transportation costs	
Travel costs		—		
(No. A-21)
-------
6
44. Termination costs applicable to sponsored"
agreements		—		 43
K. CERTIFICATION OF CHARGES	 45
(No. A-21)
-------
PRINCIPLES FOR DETERMINING COSTS APPLICABLE TO GRANTS,
CONTRACTS, AND OTHER AGREEMENTS WITH
EDUCATIONAL INSTITUTIONS
A. Purpose and scope.
1.	Objectives. This Attachment provides principles for
determining the costs applicable to research and
development, training, and other sponsored work performed by
colleges and universities under grants, contracts, and other
agreements with the Federal Government. These agreements
are referred to as sponsored agreements.
2.	Policy guides. The successful application of these
cost accounting principles requires development of mutual
understanding between representatives of universities and of
the Federal Government as to their scope, implementation,
and interpretation. It is recognized that—
a.	The arrangements for Federal agency and
institutional participation in the financing of a research,
training, or other project are properly subject to
negotiation between the agency and the institution
concerned, in accordance with such Government-wide criteria
or legal requirements as may be applicable.
b.	Each institution, possessing its own unique
combination of staff, facilities, and experience, should be
encouraged to conduct research and educational activities in
a manner consonant with its own academic philosophies and
institutional objectives.
c.	The dual role of students engaged in research
and the resulting benefits to sponsored agreements are
fundamental to the research effort and shall be recognized
in the application of these principles.
d.	Each institution, in the fulfillment of its
obligations, should employ sound management practices.
e.	The application of these cost accounting
principles should require no significant changes in the
generally accepted accounting practices of colleges and
universities. However, the accounting practices of
individual colleges and universities must support the
accumulation of costs as required by the principles, and
must provide for adequate documentation to support costs
charged to sponsored agreements.
f.	Cognizant Federal agencies involved in
negotiating indirect cost rates and auditing should assure
(No. A-21)
-------
2
that institutions are generally applying these cost
accounting principles on a consistent basis. Where wide
variations exist in the treatment of a given cost item among
institutions, the reasonableness and eguitableness of such
treatments should be fully considered during the rate
negotiations and audit.
3. Application. These principles shall be used in
determining the allowable costs of work performed by
colleges and universities under sponsored agreements. The
principles shall also be used in determining the costs of
work performed by such institutions under subgrants, cost-
reimbursement subcontracts, and other awards made to them
under sponsored agreements. They also shall be used as a
guide in the pricing of fixed-price contracts and
subcontracts where costs are used in determining the
appropriate price. The principles do not apply to:
a.	Arrangements under which Federal financing is m
the form of loans, scholarships, fellowships, traineeships,
or other fixed amounts based on such items as education
allowance or published tuition rates and fees of an
institution.
b.	Capitation awards.
c.	Other awards under which the institution is not
required to account to the Government for actual costs
incurred.
B. Definition of terms.
1. Major functions of an institution refers to
instruction (includes departmental research), organized
research, other sponsored activities, and other
institutional activities as defined below:
a.	Instruction means the teaching and training
activities of an institution. Except for research training
as provided in c below, this term includes all teaching and
training activities, whether they are offered for credits
toward a degree or certificate or on a noncreait basis, and
whether they are offered through regular academic
departments or separate divisions, such as a summer school
division or an extension division.
b.	Departmental research means all research ana
development activities that are not organised research and,
consequently, are not separately budgeted and accounted for.
(No. A-21)
-------
3
Departmental research, for purposes of this document, is not
considered as a major function of an institution but as a
part of the instruction function of the institution.
c. Organized research means all research and
development activities of an institution that are separately
budgeted and accounted for. This term includes research and
development activities that are sponsored by Federal and
non-Federal agencies and organizations, as well as those
that are separately budgeted by the institution under an
internal allocation of institutional funds. It also
includes activities involving the training of individuals in
research techniques (commonly called research training)
where such activities utilize the same facilities as other
research and development activities, and where such
activities are not included in the instruction function.
The costs of organized research and development activities
include all costs incurred by the institution in performing
the activities.
a. Other sponsored activities means programs and
projects financed by Federal and non-Federal agencies and
organizations which involve the performance of work other
than instruction and organized research. Examples of such
programs ana projects are health service projects, and
community service programs. However, when any of these
activities are undertaken by the institution without outside
support, they may be classified as other institutional
activities.
e. Other institutional activities means all
activities of an institution except: (1) instruction,
departmental research, organized research, and other
sponsored activities, as defined above; (2) indirect cost
activities identified in Section F; and (3) specialized
service facilities described in Section J38. Other
institutional activities include operation of residence
halis, dining halls, hospitals and clinics, student unions,
intercollegiate athletics, bookstores, faculty housing,
student apartments, guest houses, chapels, theaters, public
museums, and other similar auxiliary enterprises. This
definition also includes any other categories of activities,
costs of which are "unallowable" to sponsored agreements,
unless otherwise indicated in the agreements.
2. Sponsored agreement, for purposes of this Circular,
means any grant, contract, or other agreement between the
institution and the Federal Government.
(No. A-21)
-------
4
3. Allocation means the process of assigning a cost, or
a group of costs, to one or more cost objective, in
reasonable and realistic proportion to the benefit provided
or other equitable relationship. A cost objective may be a
major function of the institution, a particular service or
project, a sponsored agreement, or an indirect cost
activity, as described in Section F. The process may entail
assigning a cost(s) directly to a final cost objective or
through one or more intermediate cost objectives.
C. Basic considerations.
1.	Composition of total costs. The cost of a sponsored
agreement is compriseH oT the allowable direct costs
incident to its performance, plus the allocable portion of
the allowable indirect costs of the institution, less
applicable credits as described in 5 below.
2.	Factors affecting allowability of costs. The tests
of allowability of costs under these principles are: (a)
they must be reasonable; (b) they must be allocable to
sponsored agreements under the principles and methods
provided herein; (c) they must be given consistent treatment
through application of those generally accepted accounting
principles appropriate to the circumstances; and (d) they
must conform to any limitations or exclusions set forth in
these "principles or in the sponsored agreement as to types
or amounts of cost items.
3.	Reasonable costs. A cost may be considered
reasonable IT tEe nature of the goods or services acquired
or applied, and the amount involved therefor, reflect the
action that a prudent person would have taken under the
circumstances prevailing at the time the decision to incur
the cost was made. Major considerations involved in the
determination of the reasonableness of a cost are: (a)
whether or not the cost is of a type generally recognized as
necessary for the operation of the institution or the
performance of the sponsored agreement; (b) the restraints
or requirements imposed by such factors as arm's-length
bargaining, Federal and State laws and regulations, and
sponsored agreement terms and conditions; (c) whether or not
the individuals concerned acted with due. prudence in the
circumstances, considering their responsibilities to the
institution, its employees, its students, the Government,
and the public at large; and (d) the extent to which the
actions taken with respect to the incurrence of the cost are
consistent with established institutional policies and
(No. A-21)
-------
5
practices applicable to the work of the institution
generally, including sponsored agreements.
4.	Allocable costs.
a.	A cost is allocable to a particular cost
objective (i.e., a' specific function, pro.ject, sponsored
agreement, department, or the like) if the goods or services
involved are chargeable or assignable to such cost
objective in accordance with relative benefits received or
other equitable relationship. Subject to the foregoing, a
cost is allocable to a sponsored agreement if (1) it is
incurred solely to advance the work under the sponsored
agreement; (2~) it benefits both the sponsored agreement and
other work of the institution, in proportions that can be
approximated through use of reasonable methods, or (3) it is
necessary to the overall operation of the institution and,
in light of the principles provided in this Circular, is
deemed to be assignable in part to sponsored projects,
where the purchase of equipment or other capital items is
specifically authorized under a sponsored agreement, the
amounts thus authorized for such purchases are assignable to
the sponsored agreement regardless of the use that may
subsequently be made of the equipment or other capital items
involved.
b.	Any costs allocable to a particular sponsored
agreement under the standards provided in this Circular may
not be shifted to other sponsored agreements in order to
meet deficiencies caused by overruns or other fund
considerations, to avoid restrictions imposed by law or by
terms of the sponsored agreement, or for other reasons of
convenience.
5.	Applicable credits.
a. The term applicable credits refers to those
receipts or negative expenditures that operate to offset or
reduce direct or indirect cost items. Typical examples of
such transactions are: purchase discounts, rebates, or
allowances; .recoveries or indemnities on losses; and
adjustments of overpayments or erroneous charges. This term
also includes "educational discounts" on products or
services provided specifically to educational institutions,
such as discounts on computer equipment, except where the
arrangement is clearly and explicitly identified as a gift
by the vendor.
(No. A-21)
-------
6
b. In some instances, the amounts received from the
Federal Government to finance institutional 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
institution in determining the rates or amounts to be
charged to sponsored agreements for services rendered
whenever the facilities or other resources used in providing
such services have been financed directly, in whole or in
part, by Federal funds. (See Sections F8, J9a, and J38 for
areas of potential application in the matter of direct
Federal financing.)
6.	Costs incurred by State and local governments.
Costs incurred or paid by State or local governments on
behalf of their colleges and universities for fringe benefit
programs such as pension costs and FICA and any other costs
specifically incurred on behalf of, and in direct benefit
to, the institutions are allowable costs of such
institutions whether or not these costs are recorded in the
accounting records of the institutions, subject to the
following:
a.	The costs meet the requirements of CI through 5
above.
b.	The costs are properly supported by cost
allocation plans in accordance with applicable Federal cost
accounting principles.
c.	The costs are not otherwise borne directly or
indirectly by the Federal Government.
7.	Limitations on allowance of costs. Sponsored
agreement! miy 5e subject to statutory requirements that
limit the allowance of costs. When the maximum amount
allowable under a limitation is less than the total amount
determined in accordance with the principles in this
Circular, the amount not recoverable under a sponsored
agreement may not be charged to other sponsored agreements.
D. Direct costs.
1. General. Direct costs are those costs that can be
identified specifically with a particular sponsored project,
an instructional activity, or any other institutional
activity; or that can be directly assigned to such
activities relatively easily with a high degree of accuracy.
(No. A-21)
-------
7
2. Application to sponsored agreements. Identification
with the sponsored work rather than the nature of the goods
and services involved is the determining factor in
distinguishing direct from indirect costs of sponsored
agreements. Typical costs charged directly to a sponsored
agreement are the compensation of employees for performance
of work under the sponsored agreement, including related
fringe benefit costs to the extent they are consistently
treated, in like circumstances, by the institution as direct
rather than indirect costs; the costs of materials consumed
or expended in the performance of the work; and other items
of expense incurred for the sponsored agreement, including
extraordinary utility consumption. The cost of materials
supplied from stock or services rendered by specialized
facilities or other institutional service operations may be
included as direct costs of sponsored agreements., provided
such items are consistently treated, in like circumstances,
by the institution as direct rather than indirect costs, and
are charged under a recognized method of computing actual
costs, and conform to generally accepted cost accounting
practices consistently followed by the institution.
E. Indirect costs.
1.	General. Indirect costs are those that are incurred
for common or joint objectives and therefore cannot be
identified readily and specifically with a particular
sponsored project, an instructional activity, or any other
institutional activity. At educational institutions such
costs normally are classified under the following indirect
cost categories: depreciation and use allowances, general
administration and general expenses, sponsored projects
administration expenses, operation and maintenance expenses,
library expenses, departmental administration expenses, and
student administration and services.
2.	Criteria for distribution.
a.	Base period. A base period for distribution of
indirect costs li tKe period during which the costs are
incurred. The base period normally should coincide with the
fiscal year established by the institution, but in any event
the base period should be so selected as to avoid inequities
in the distribution of costs.
b.	Need for cost groupings. The overall objective
of the indirect cost allocation process is to distribute the
indirect costs described in Section F to the major functions
of the institution ir. proportions reasonably consistent with
(No. A-21)
-------
8
the nature and' extent of their use of the institution's
resources. In order to achieve this objective, it may be
necessary to provide for selective distribution by
establishing separate groupings of cost within one or more
of the indirect cost categories referred to in El above. In-
general, the cost groupings established within a category
should constitute, in each case, a pool of those items of
expense that are considered to be of like nature in terms of
their relative contribution to (or degree of remoteness
from) the particular cost objectives to which distribution
is appropriate. Cost groupings should be established
considering the general guides provided in c below. Each
such pool or cost grouping should then be distributed
individually to the. related cost objectives, using the
distribution base or method most appropriate in the light of
the guides set forth in d below.
c. General considerations on cost groupings. The
extent to which separate cost groupings and selective
distribution would be appropriate at an institution is a
matter of judgment to be determined on a case-by-case basis.
Typical situations which may warrant the establishment of
two or more separate cost groupings (based on account
classification or analysis) within an indirect cost category
include but are not limited to the following:
(1)	Where certain items or categories of
expense relate solely to one of the major functions of the
institution or to less than all functions, such expenses
should be set aside as a separate cost grouping for direct
assignment or selective allocation in accordance with the
guides provided in E2b and d.
(2)	Where any types of expense ordinarily
treated as general administration or departmental
administration are charged to sponsored agreements as direct
costs, expenses applicable to other activities of the
institution when incurred for the same purposes in like
circumstances must, through separate cost groupings, be
excluded from the indirect costs allocable to those
sponsored agreements and included in the direct cost of
other activities for cost allocation purposes.
(3)	Where it is determined that certain
expenses are for the support of a service unit or facility
whose output is susceptible of measurement on a workload or
other quantitative basis, such expenses should be set aside
as a separate cost grouping for distribution on such basis
(No. A-21)
-------
9
to organized research, instructional, and other activities
at the institution or within the department.
(4)	Where activities provide their own
purchasing, personnel administration, building maintenance
or similar service, the distribution of general
administration and general expenses, or operation and
maintenance expenses to such activities should be
accomplished through cost groupings which include only that
portion of central indirect costs (such as for overall
management) which are properly allocable to such activities.
(5)	where the institution elects to treat
fringe benefits as indirect charges, such costs should be
set aside as a separate cost grouping for selective
distribution to related cost objectives.
(6)	The number of separate cost groupings
within a category should be held within practical limits,
after taking into consideration the materiality of the
amounts involved and the degree of precision attainable
through less selective methods of distribution.
d. Selection of distribution method.
(1)	Actual conditions must be taken into
account in selecting the method or base to be used in
distributing individual cost groupings. The essential
consideration in selecting a base is that it be the one best
suited for assigning the pool of costs to cost objectives in
accordance with benefits derived; a traceable cause and
effect relationship; or logic and reason, where neither
benefit nor cause and effect relationship is determinable.
(2)	Where a cost grouping can be identified
directly with the cost objective benefited, it should be
assigned to that cost objective.
(3)	Where the expenses in a cost grouping are
more general in nature, the distribution may be based on a
cost analysis study which results in an equitable
distribution of the costs. Such cost analysis studies may
take into consideration weighting factors, population, or
space occupied if appropriate. Cost analysis studies,
however, must (a) be appropriately documented m sufficient
detail for subsequent review by the cognizant Federal
agency, (b) distribute the costs to the related cost
objectives in accordance with the relative benefits derived,
(c) be statistically sound, (d) be performed specifically at
(No. A-21)
-------
10
the institution at which the results are to be used, and (e)
be reviewed periodically, but not less frequently than every
two years, updated if necessary, and used consistently. Any
assumptions made in the study must be stated and explained.
The use of cost analysis studies and periodic changes in the
method of cost distribution must be fully justified.
(4) If a cost analysis study is not performed,
or if the study does not result in an equitable distribution
of the costs, the distribution shall be made in accordance
with the appropriate base cited in Section F., unless one of
the following conditions is met: (a) it can be demonstrated
that the use of a different base would result in a more
equitable allocation of the costs, or that a more readily
available base would not increase the costs charged to
sponsored agreements, or (b) the institution qualifies for,
and elects to use, the simplified method for computing
indirect cost rates described in Section H.
e. Order of Distribution.
(1)	Indirect cost categories consist of
depreciation and use allowance, operation and maintenance,
general administration and general expenses, departmental
administration, sponsored projects administration, library,
and student administration and services, as described m
Section F.
(2)	Depreciation and use allowances, operation
and maintenance expenses, and general administrative ana
general expenses should be allocated in that order to the
remaining indirect cost categories as well as to the major
functions and specialized service facilities of. the
institution. Other cost categories may be allocated in the
order determined to be most appropriate by the institutions.
When cross allocation of costs is made as provided in (3)
below, this order of allocation does not apply.
(3)	Normally an indirect cost category will be
considered closed once it has been allocated to other cost
objectives, and costs may not be subsequently allocated to
it. However, a cross allocation of costs between two or
more indirect cost categories may be used if such allocation
will result in a more equitable allocation of costs. If a
cross allocation is used, an appropriate modification to the
composition of the indirect cost categories described in
Section F is required.
(No. A-21)
-------
li
F. Identification and assignment of indirect costs.
1. Depreciation and use allowances.
a.	The expenses under this heading are the portion
of the costs of the institution's buildings, capital
improvements to land and buildings, and equipment which are
computed in accordance with Section J9.
b.	In the absence of the alternatives provided for
in Section E2d, the expenses included in this category shall
be allocated in the following manner:
(1)	Depreciation or use allowances on buildings
used exclusively in the conduct of a single function, and on
capital improvements and equipment used in such buildings,
shall be assigned to that function.
(2)	Depreciation or use allowances on
buildings, used for more than one function, and on capital
improvements and equipment used in such buildings, shall be
allocated to the individual functions performed in each
building on the basis of usable square feet of space,
excluding common areas such as hallways, stairwells, and
restrooms.
(3)	Depreciation or use allowances on buildings
and capital improvements where space is used jointly, and on
equipment used jointly, shall be allocated to benefiting
functions in proportion to the total salaries and wages
applicable to the joint functions.
(4)	Depreciation or use allowances on
buildings, capital improvements, and equipment used
predominantly for one function and only incidentally for
other(s), may be assigned to the function in which it is
used predominantly.
(5)	Depreciation or use allowances on certain
capital improvements to land, such as paved parking areas,
fences, sidewalks, and the like, not included in the cost of
buildings, shall be allocated to user categories of students
and employees on a full-time equivalent basis. The amount
allocated' to the student category shall be assigned to the
instruction function of the institution. The amount
allocated to the employee category shall be further
allocated to the major functions of the institution in
proportion to the salaries and wages of all employees
applicable to those functions.
(No. A-21)
-------
12
2.	Operation and maintenance expenses.
a.	The expenses under this heading are those that
have been incurred by a central service organization or at
the departmental level for the administration, supervision,
operation, maintenance, preservation, and protection of the
institution's physical plant. They include expenses
normally incurred for such items as janitorial and utility
services; repairs and ordinary or normal alterations of
buildings, furniture and equipment; and care of grounds and
maintenance and operation of buildings and other plant
facilities. The operation and maintenance expense category
should also include the fringe benefit costs applicable to
the salaries and wages included therein, and depreciation
ana use allowance.
b.	In the absence of the alternatives provided for
in Section E2d, the expenses included in this category shall
be allocated in the same manner as described in Section Fib
for depreciation and use allowances.
3.	General administration and general expenses.
a.	The expenses under this heading are those that
have been incurred for the general executive and
administrative offices of educational institutions and other
expenses of a general character which do not relate solely
to any major function of the institution; i.e., solely to
(1) instruction, (2) organized research, (3) other sponsored
activities, or (4) other institutional activities. The
general administration and general expense category should
also include the fringe benefit costs applicable to the
salaries and wages included therein, an appropriate share of
operation and maintenance expense, and depreciation and use
allowances.
b.	In the absence of the alternatives provided for
in Section E2d, the expenses included in this category shall
be grouped first according to common major functions of the
institution to which they render services or provide
benefits. The aggregate expenses of each group shall then
be allocated to serviced or benefited functions on the
modified total cost basis. Modified total costs consist of
salaries and wages, fringe benefits, materials and supplies,
services, travel, and subgrants and subcontracts up to
525,000 each. When an activity included in this indirect
cost category provides a service or product to another
institution or organization, an appropriate adjustment must
(No. a-21)
-------
13
be made to either the expenses or the basis of allocation or
both, to assure a proper allocation of costs.
4. Departmental administration expenses.
a.	The expenses under this heading are those that
have been incurred for administrative • and supporting
services that benefit common or joint departmental
activities or objectives in academic deans' offices,
academic departments and divisions, and organized research
units. Organized research units include such units as
institutes, study centers, and research centers.
Departmental administration expenses are subject to the
following limitations.
(1)	Academic deans' offices. Salaries and
operating expenses are limited to those attributable to
administrative functions.
(2)	Academic departments:
(a)	The salaries of the heads of academic
departments, divisions, and organized research units are
limited to amounts attributable to their administrative
duties. Salaries of professorial or professional staff,
whose appointment or assignment require administrative work
that benefits sponsored projects, may also be included to
the extent that the portion so charged is clearly and
specifically supported as required in Section J6.
(b)	Other administrative and supporting
expenses incurred within academic departments are allowable
provided they are treated consistently in like
circumstances. This would include expenses such as the
salaries of secretarial and clerical staffs, the salaries of
administrative officers and assistants, travel, office
supplies, stockrooms, and the like.
(3)	Other fringe benefit costs applicable to
the salaries and wages included in (1) and (2) above are
allowable, as well as an appropriate share of general
administration and general expenses, operation and
maintenance expenses, and depreciation and/or use
allowances.
b.	In the absence of the alternatives provided for
in Section E2d, the expenses included in this category shall
be allocated as follows:
(No. A-21)
-------
14
(1)	The administrative expenses of the dean's
office of each college and school shall be allocated to the
academic departments within that college or school on the
modified total cost basis.
(2)	The administrative expenses of each
academic department, and the department's share of the
expenses allocated in (1) above shall be allocated to the
appropriate functions of the department on the modified
total cost basis.
5. Sponsored projects administration.
a.	The expenses under this heading are those that
have been incurred by a separate orgamzation(s) established
primarily to administer sponsored projects, including such
functions as grant and contract administration (Federal and
non-Federal), special security, purchasing, personnel
administration, and editing and publishing of research anc
other reports. They include the salaries and expenses of
the head of such organization, his assistants, and their
immediate staff, together with the salaries and expenses of
personnel engaged in supporting activities maintained by the
organization, such as stock rooms, stenographic pools, and
the like. The salaries of professorial or professional
staff whose appointments or assignments involve the
performance of such administrative work may also be included
to the extent that the portion so charged to sponsored
agreements administration is clearly identified and
supported as required by Section J6. This category should
also include the fringe benefit costs applicable to the
• salaries and wages included therein, an appropriate share of
general administration and general expenses, the operation
and maintenance expenses, and depreciation ana use
allowance. Appropriate adjustments should be made for
services provided to other functions or organizations.
b.	In the absence of the alternatives provided for
in Section E2d. the expenses included in this category shall
be allocated to the major functions of the institution under
which the sponsored projects are conducted on the basis of
the modified total cost of sponsored projects.
c.	An appropriate adjustment shall be made to
eliminate any duplicate charges to sponsored agreements when
this category includes similar or identical activities as
those included in the general administration and general
expense category or other indirect cost items, such as
accounting, procurement, or personnel administration.
(No. A-21)
-------
15
6. Library expenses.
a.	The expenses under this heading are those that
have been incurred for the operation of the library,
including the cost of books and library materials purchased
for the library, less any items of library income that
qualify as applicable credits under Section.C5. The library
expense category should also include the fringe benefits
applicable to the salaries and wages included therein, an
appropriate share of general administration and general
expense, operation and maintenance expense, and depreciation
and use allowances. Costs incurred in the purchases of rare
books (museum-type books) with no value to sponsored
agreements should not be allocated to them.
b.	In-the absence of the alternatives provided for
in Section E2d, the expenses included in this category shall
be allocated first on the basis of primary categories of
users, including students, professional employees, and other
users.
(1) The student category shall consist of full-
time equivalent students enrolled at the institution,
regardless of whether they earn credits toward a degree or
certificate.
(-2) The professional employee category shall
consist of all faculty members and other professional
employees of the institution, on a full-time equivalent
basis.
(3) The other users category shall consist of
all other users of library facilities.
c.	Amounts allocated in b above shall- be assigned
further as follows:
(1)	The amount in the student category shall be
assigned to the instruction function of the institution.
(2)	The amount in the professional employee
category shall be assigned" to the major functions of the
institution in proportion to the salaries and wages of all
faculty members and other professional employees applicable
to those functions.
(3)	The amount in the other users category
shall be assigned to the other institutional activities
function of the institution.
(No. A-21)
-------
16
7.	Student administration and services.
a.	The expenses under this heading are those that
have been incurred for the administration of student affairs
and for services to students, including expenses of such
activities as deans of students, admissions, registrar,
counseling and placement services, student advisers, student
health and infirmary services, catalogs, and commencements
and convocations. The salaries of members of the academic
staff whose academic appointments or assignments involve the
performance of such administrative or service work may also
be included to the extent that the portion so charged is
supported pursuant to Section J6. This expense category
also includes the fringe benefit costs applicable to the
salaries and wages included therein, an appropriate share of
general administration and general expenses, operation and
maintenance, and use allowances and/or depreciation.
b.	In the absence of the alternatives provided for
in Section E2d, the expenses in this category shall be
allocated to the instruction function, and subsequently to
sponsored agreements in that function.
8.	Offset for indirect expenses otherwise provided for
by the Government.
a. The. items to be accumulated under this heading
are the reimbursements and other payments from the Federal
Government which are made to the institution to support
solely, specifically, and directly, in whole or in part, any
of the administrative or service activities described in F1
through 7 above.
b. The items in this group shall be treated as a
credit to the affected individual indirect cost category
before that category is allocated to benefiting functions.
G. Determination and application of indirect cost rate or
rates.
1. Indirect cost pools.
a. Subject to b below, the separate categories of
indirect costs allocated to each major function of the
institution as prescribed in Section F shall be aggregated
and treated as a common pool for that function. The amount
in each pool shall be divided by the distribution base
described in G2 below to arrive at a single indirect cost
(No. A-21)
-------
17
rate for each function. The rate for each function is used
to distribute indirect costs to individual sponsored
agreements of that function. Since a common pool is
established for each major function of the institution, a
separate indirect cost rate would be established for each of
the major functions described in Section B1 under which
sponsored agreements are carried out.
b. In some instances a single rate basis for use
across the board on all work within a major function at an
institution may not be appropriate. A single rate for
research, for example, might not take into account those
different environmental factors and other conditions which
may affect substantially the indirect costs applicable to a
particular segment of research at the institution. A
particular segment of research may be that performed under a
single sponored agreement or it may consist of research
under a group of sponsored agreements performed in a common
environment. The environmental factors are not limited to
the physical location of the work. Other important factors
are the level of the 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. Where a particular segment of a sponsored
agreement is performed within an environment which appears
to generate a significantly different level of indirect
costs, provision should be made for a separate indirect cost
pool applicable to such work. The separate indirect cost
pool should be developed during the regular course of the
rate determination process and the separate indirect cost:
rate resulting therefrom should be utilized; provided it is
determined that (1) such indirect cost rate differs
significantly from that which would have been obtained under
a. above, and (2) the volume of work to which such rate
would apply is material in relation to other sponsored
agreements at the institution.
2. The distribution basis. Indirect costs shall be
distributed to applicable sponsored agreements on the basis
of modified total direct costs, consisting of salaries and
wages, fringe benefits, materials and supplies, services,
travel, and subgrants and subcontracts up to $25,000 each.
For this purpose, an indirect cost rate should be determined
for each of the separate indirect cost pools developed
pursuant to Gl, above. The rate in each case should be
stated as the percentage which the amount of the particular
indirect cost pool is of the modified total direct costs
identified with such pool. Other bases may be used where it
(No. A-21)
-------
18
can be demonstrated that they produce more equitable
results.
3.	Negotiated lump sum for indirect costs. A
negotiated fixed amount in lieu of indirect costs may be
appropriate for self-contained, off-campus, or primarily
subcontracted activities where the benefits.derived from an
institution's indirect services cannot be readily
determined. Such negotiated indirect costs will be treated
as an offset before allocation to instruction, organized
research, other sponsored activities, and other
institutional activities. The base on which such remaining
expenses are allocated should be appropriately adjusted.
4.	Predetermined fixed rates for indirect costs.
Public Law 87-638 (76 Stat. 437) authorizes the use of
predetermined fixed rates in determining the indirect costs
applicable under research agreements with educational
institutions. The stated objectives of the law are to
simplify the administration of cost-type research and
development contracts (including grants) with educational
institutions, to facilitate the preparation of their
budgets, and to permit more expeditious closeout of such
contracts when the work is completed. In view of the
potential advantages offered by this procedure,
consideration should be given to the negotiation of
predetermined fixed rates for indirect costs in those
situations where the cost experience and other pertinent
facts available are deemed sufficient to enable the parties
involved to reach an informed judgment as to the probable
level of indirect costs during the ensuing accounting
period.
5.	Negotiated fixed rates and carry-forward provisions.
When a fixed rate is negotiated in advance for a fiscal year
(or other time period), the over- or under-recovery for that
year may be included as an adjustment to the -indirect cost
for the next rate negotiation. When the rate is negotiated
before the carry-forward adjustment is determined, the
carry-forward amount may be applied to the next subsequent
rate negotiation. When such adjustments are to be made,
each fixed rate negotiated in advance for a given period
will be computed by applying the expected indirect costs
allocable to sponsored agreements for the' forecast period
plus or minus the carry-forward adjustment (over- or under-
recovery) from the prior period, to the forecast
distribution base. Unrecovered amounts under lump-sum
agreements or cost-sharing provisions of prior years shall
not be carried forward for consideration in the new rate
(No. A-21)
-------
19
negotiation. • There ' must, however, be an advance
understanding in each case between the institution ana the
cognizant Federal agency as to whether these differences
will be considered in the rate negotiation rather than
making the determination after the differences are known.
Further, institutions electing to use this carry-forward
provision may not subsequently change without prior approval
of the cognizant Federal agency. In the event that an
institution returns to a postdetermined rate, any over- or
under-recovery during the period in which negotiated fixed
rates and carry-forward provisions were followed will be
included in the subsequent postdetermined rates. Where
multiple rates are used, the same procedure will be
applicable for determining-each rate.
¦H. Simplified method for small institutions.
1.	General.
a.	Where the total direct cost of work covered by
this Circular at an institution does not exceed S3,000,000
m a fiscal year, the use of the simplified procedure
described in 2, below, may be used in determining allowable
indirect costs. Under this simplified procedure, the
institution's most recent annual financial report and
immediately available supporting information with salaries
ana wages segregated from other costs, will be utilized as a
basis for determining the indirect cost rate applicable to
all sponsored agreements.
b.	The simplified procedure should not be used
where it produces results which appear inequitable to the
Government or the institution. In any such case, indirect
costs should be determined through use of the regular
procedure.
2.	Simplified procedure
a.	Establish the total amount of salaries and wages
paid to all employees of the institution.
b.	Establish an indirect cost pool consisting of
the expenditures (exclusive of capital items and other costs
specifically identified as unallowable) which customarily
are classified under the following titles or their
equivalents:
(No. A-21)
-------
20
(1)	General administration and general expenses
(exclusive of costs of student administration and services,
student activities, student aid, and scholarships).
(2)	Operation and maintenance of physical
plant; and depreciation and use allowances; after
appropriate adjustment for costs applicable to other
institutional activities.
(3)	Library.
(4)	Department administration expenses, which
will be computed as 20 percent of the salaries and expenses
of deans and heads of departments.
In those cases where expenditures classified under (1) above
have previously been allocated to other institutional
activities, they may be included in the indirect cost pool.
The total amount of salaries and wages included in the
indirect cost pool must be separately identified.
c.	Establish a salary and wage distribution base,
determined by deducting from the total of salaries and wages
as established in a above the amount of salaries and wages
included under b above.
d.	Establish the indirect cost rate, determined by
dividing the amount in the indirect cost pool, b above, by
the amount of the distribution base, c above.
e.	Apply the indirect cost rate to direct salaries
and wages for individual agreements to determine the amount
of indirect costs allocable to such agreements.
J. General provisions for selected items of cost.
Sections 1 through 44 below provide principles to be applied
in establishing the allowability of certain items involved
in determining cost. These principles should apply
irrespective of whether a particular item of cost is
properly treated as direct cost or indirect cost. Failure
to mention a particular item of cost is- not intended to
imply that it is either allowable or unallowable; rather
determination as to allowability in each case should be
based on the treatment provided for similar or related
items of cost. In case of a discrepancy between the
provisions of a specific sponsored agreement and the
provisions below, the agreement should govern.
(No. A-21)
-------
21
1.	Advertising costs.
a.	The term advertising costs means the costs of
advertising media and corollary administrative costs.
Advertising media include magazines, newspapers, radio and
television programs, direct mail, exhibits, and the like.
b.	The only advertising costs allowable are those
which are solely for (1) the recruitment of personnel
required for the performance by the institution of
obligations arising under the sponsored agreement, when
considered in conjunction with all other recruitment costs,
as set forth in Section J32; (2) the procurement of goods
and services for the performance of the sponsored agreement;
(3) the disposal of scrap or surplus materials acquired in
the performance of the sponsored agreement except when
institutions are reimbursed for disposal costs at a
predetermined amount in accordance with Attachment N, OMB
Circular No. A-110; or (4) other specific purposes necessary
to meet the requirements of the sponsored agreement.
c.	Costs of this nature, if incurred for more than
one sponsored agreement or for both sponsored work and other
work of the institution, are allowable to the extent that
the principles in Sections D and E are observed.
2.	Bad debts. Any losses, whether actual or estimated,
arising from uncollectible accounts and other claims,
related collections costs, and related legal costs, are
unallowable.
3. Civil defense costs. Civil defense costs are those
incurred in planning for, and the protection of life and
property against, the possible effects of enemy attack.
Reasonable costs of civil defense measures (including costs
in excess of normal plant protection costs, first-aid
training and supplies, firefighting training, posting of
additional exit notices and directions, and other approved
civil defense measures) undertaken on the institution's
premises pursuant to suggestions or requirements of civil
defense authorities are allowable when distributed to all
activities of the institution. Capital expenditures for
civil defense purposes will not be allowed, but a use
allowance or depreciation may be permitted in accordance
with provisions set forth in Section J9. Costs of local
civil defense projects not on the institution's premises are
unallowable.
(No. A-21)
-------
22
4.	'Commencement and convocation costs. Costs incurred
for commencements ana convocations are unallowable, except
as provided for in Section F7.
5.	Communication costs. Costs incurred for telephone
services'] local anH long distance telephone calls,
telegrams, radiograms, postage and the like, are allowable.
6.	Compensation for personal services
a.	General. Compensation for personal services
covers all amounts paid currently or accrued by the
institution for services of employees rendered during the
period of. performance under sponsored agreements. Such
amounts include salaries, wages, and fringe benefits (See
Section J15.). These costs are allowable to the extent that
the total compensation to individual employees conforms to
the established policies of the institution, consistently
applied, ana provided 'chat the charges for work performed
directly on sponsored agreements and for other work
allocable as indirect costs are determined and supported as
provided below. Charges to sponsored agreements may include
reasonable amounts for activities contributing and
intimately related to work under the agreements, such as
delivering special lectures about specific aspects of the
ongoing ' activity, writing reports and articles,
participating in 'appropriate seminars, consulting with
colleagues and graduate students, and attending meetings and
conferences. Incidental work (that in excess of normal for
the individual), for which supplemental compensation is paid
by an institution under institutional policy, need not be
included in the payroll distribution systems described
below, provided such work and compensation are separately
identified and documented in the financial management system
of the institution.
b.	Payroll distribution. For each organizational
unit of an institution, the distribution of salaries and
wages of professorial or professional staff (whether charged
direct or required to be distributed to more than one
activity for purposes of allocating indirect costs) will be
based on either a system of monitored workload or a system
of personnel activity reports. The latter system will be
used for nonprofessional employees whose costs are charged
direct or are required to be distributed to more than one
activity for purposes of allocating indirect costs. In the
use of either method, it is recognized that, because of the
nature of work involved in academic institutions, the
various and often interrelated activities of professorial
(No. A-21)
-------
23
and professional employees frequently cannot be measured
with a high degree of precision, that reliance must be
placed on reasonably accurate approximations, and that
acceptance of a degree of tolerance in measurement is
appropriate.
c. Monitored workload. Under this method the
distribution oT salaries and wages applicable to sponsored
agreements is based on budgeted or assigned workload,
updated to reflect any significant changes in workload
distributions. A monitored workload system used for
salaries and wages charged directly or indirectly to
sponsored agreements will meet the following standards:
(1)	A system of budgeted or assigned workload
will be incorporated into the official records of the
institution and encompass both sponsored and all other
activities on an integrated basis. The system may include
the use of subsidiary records.
(2)	The system will reasonably reflect workload
of employees, accounting for 100 percent of the work for
which the employee is compensated and which is required in
fulfillment of the employee's obligations to the
institution. Because practices vary among institutions and
within institutions as to the total activity constituting a
full workload — when expressed in measurable units, such as
contact hours in teaching — the system will be based on a
determination for each individual, reflecting the ratio of
each of the activities which comprise the total workload of
the individual. (But see Section H for treatment of
indirect costs under the simplified method for small
institutions.)
(3)	The system will provide for modification of
an individual's salary or salary distribution commensurate
with any significant change in the employee's workload or
the ratio of activities comprising the total workload. A
significant change in an employee's workload shall be
considered to include the following as a minimum: when work
begins or ends on a sponsored agreement, when a teaching
load is materially modified, when additional unanticipated
assignments are received or taken away, when, an individual
begins or ends a sabbatical leave, prolonged sick leave, or
leave without pay, etc. Short-term " (such as one or two
months) fluctuation between workload categories need not be
considered as long as the distribution of salaries and wages
is reasonable over the longer term such as an academic
period. Whenever it is apparent that a change in workload
(No. A-21)
-------
24
will occur cr has occurred, the change will be documented
over the signature of a responsible official and, if
significant, entered into the system.
(4)	The system will utilize workload categories
reflecting activity which is applicable to each sponsored
agreement, each indirect cost activity, and each major
function of the institution.
(5)	At least annually a statement will be
signed by the employee, principal investigator, or
responsible official, having first hand knowledge of the
work stating that salaries and wages charged to sponsored
agreements as direct charges, or that salaries and wages
charged to both direct and indirect cost categories, or to
more than one indirect cost category are reasonable.
(6)	The system will provide for independent
internal evaluations to insure that it is working
effectively.
(7)	In the use of this method an institution
shall not be required to provide additional support or
documentation for the effort actually performed, but. is
responsible for assuring that the system meets the above
standards.
d. Personnel activity reports. Under this system
the distribution oi salaries"and~ wages will be supported by
personnel activity reports as prescribed below.
(1)	Personnel activity reports will reflect the
distribution of activity expended by each employee covered
by the system.
(2)	The reports will reflect an after-the-fact
reporting of the percentage of activity of each employee.
Charges may be made initally on the basis of estimates made
before the services are performed, provided that such
charges are promptly adjusted if significant differences are
indicated by activity reports.
(3)	Each report will account for 100 percent of
the activity for which the employee is compensated and which
is required in fulfillment of the employee's obligations to
the institution. The report will reasonably reflect the
percentage of activity applicable to each sponsored
agreement, each indirect cost category, and each major
function of the institution.
(No. A-21)
-------
25
(4)	To confirm that the distribution of
activity represents a reasonable estimate of the work
performed by the employee during the period, each report
will be signed by the employee or by a responsible official
having first hand knowledge of the work performed.
(5)	For professorial and professional staff,
the reports will be prepared each academic term, but no less
frequently than every six months. For other individuals,
the reports will be prepared no less frequently than monthly
and will coincide with one or more pay periods.
(6)	Where the institution uses time cards or
other forms of after-the-fact payroll documents as original
documentation for payroll and payroll charges, such
documents shall qualify as a personnel activity report
provided that they are meet the requirements in (1) through
(5) above.
e. Salary rates for faculty members.
(1) Salary rates for academic year. Charges
for work performed on sponsored agreements by faculty
members during the academic year will be based on the
individual faculty member's regular compensation for the
continuous period which, under the policy of the institution
concerned, constitutes the basis of his salary. Charges for
work performed on sponsored agreements during all or any
portion of such period are allowable at the base salary
rate. In no event will charges to sponsored agreements,
irrespective of the basis of computation, exceed the
proportionate share of the base salary for that period.
This principle applies to all members of the faculty at an
institution. Since intra-university consulting is assumed
to be undertaken as a university obligation requiring no
compensation in addition to full-time base salary, the
principle also applies to faculty members who function as
consultants or otherwise contribute to a sponsored agreement
conducted by another faculty member of the same institution.
However, in unusual cases where consultation is across
departmental lines or involves a separate or remote
operation, and the work performed by the consultant is in
addition to his regular departmental load, any charges for
such work representing extra compensation above the base
salary are allowable provided that such consulting
arrangements are specifically provided for in the agreement
or approved in writing by the sponsoring agency.
(No. A-21)
-------
26
(2)	Periods outside the academic year.
(a)	Except as otherwise specified for
teaching activity in (b) below, charges for work performed
by faculty members on sponsored agreements during the summer
months or other period not included in the base salary
period will be determined for each faculty member at a rate
not in excess of the base salary divided by the period to
which the base salary relates, and will be limited to
charges made in accordance with other parts of this section.
The base salary period used in computing charges for work
performed during the summer months will be the number of
months covered by the faculty member's official academic
year appointment.
(b)	Charges for teaching activities
performed by faculty members on sponsored agreements during
the summer months or other periods not included in the base
salary period will be based on the normal policy of the
institution governing compensation to faculty members for
teaching assignments during such periods.
(3)	Part-time faculty. Charges for worl
performed on sponsored agreements by faculty members having
only part-time appointments will be determined at a rate not
in excess of that regularly paid for the part-time
assignments; e.g., an institution pays $5,000 to a faculty
member for half-time teaching during the academic year. He
devoted one-half of his remaining time to a sponsored
agreement. Thus, his additional compensation, chargeable by
the institution to the agreement, would be one-half of
$5,000, or $2,500.
f. Noninstitutional professional activities.
Unless an arrangement is specifically authorized Ey a
Federal sponsoring agency, an institution must follow its
institution-wide policies and practices concerning the
permissible extent of professional services that can be
provided outside the institution for noninstitutional
compensation. Where such institution-wide policies do not
exist or do not adequately define the permissible extent of
consulting or other noninstitutional activities undertaken
for extra outside pay, the Government may require that the
effort of professional staff working on sponsored agreements
be allocated between (1) institutional activities, and (2)
noninstitutional professional activities. If the sponsoring
agency considers the extent of noninstitutional professional
effort excessive, appropriate arrangements governi:
compensation will be negotiated on a case-by-case basis.
(No. A-21)
-------
27
7.	Contingency provisions. Contributions to a
contingency reserve or any similar provision made for
events, the occurrence of which cannot be foretold with
certainty as to time, intensity, or with an assurance of
their happening, are unallowable. (But see also Section
J16c.)
8.	Deans of faculty and graduate schools. The salaries
and expenses oi deans oi faculty and graduate schools, or
their equivalents, and their staffs, are allowable.
9.	Depreciation and use allowances. Institutions may
be compensated for the use oi their buildings, capital
improvements, and equipment; provided that they are used,
needed in the institutions' activities, and properly
allocable to sponsored agreements. Such compensation shall
be made by computing either depreciation or use allowance.
Use allowances are the means of providing such compensation
when depreciation or other equivalent costs are not
computed. The allocation for depreciation or use allowance
shall be made in accordance with Section Fl. Depreciation
and use allowances are computed applying the following
'rules:
a.	The computation of depreciation or use
allowances shall be based on the acquisition cost of the
assets involved. For this purpose, the acquisition cost
will exclude (1) the cost of land; (2) any portion of the
cost of buildings and equipment borne by or donated by the
Government, irrespective of where title was originally
vested or where it is presently located; and (3) any portion
of the cost of buildings and equipment contributed by or for
the institution where law or agreement prohibit recovery.
For an asset donated to the institution by a third party,
its fair market value at the time of the donation shall be
considered as the acquisition cost.
b.	In the use of the depreciation method, the
following shall be observed:
(1) The period of useful service or useful life
established in each case for usable capital assets must take
into consideration such factors as type of construction,
nature of the equipment, technological developments in the
particular area, and the renewal and replacement policies
followed for the individual items or classes of assets
involved.
(No. A-21)
-------
28
(2)	The depreciation method used to charge 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 in the early portions than in the
later portions of its useful life, the straight-line method
shall be presumed to be -the appropriate method.
Depreciation methods once used shall not be changed unless
approved in advance by the cognizant Federal agency.
(3)	Where the depreciation method is introduced
for application to assets for which use allowance was
previously charged, the aggregate amount of use allowances
and depreciation applicable to such assets must not exceed
the total acquisition cost of the assets.
(4)	when the depreciation method is used for
buildings, a building "shell" may be treated separately from
other building components, such as plumbing system and
heating and air conditioning system. Each component item
may then be depreciated over its estimated useful life. On
the other hand, the entire building, including the shell ana
all components, may be treated as a single asset and
depreciated over a single useful life.
(5)	Where the depreciation method is used for a
particular class of assets, no depreciation may be allowed
on any such assets that have outlived their depreciable
lives. (But see also c(3), below.)
c. Under the use allowance method, the following
shall be observed:
(1)	The use allowance for buildings and
improvements (including improvements such as paved parking
areas, fences, and sidewalks) will be 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.
(2)	In contrast to the depreciation method, the
entire building must be treated as a single asset without
separating its "shell" from other building components under
the use allowance method. The entire building must be
treated as a single asset, and the two-percent use allowance
limitation must be applied to all parts of the building.
The two-percent limitation, however, need not be applied to
(No. A-21)
-------
29
equipment or other assets that are merely attached or
fastened to the building but not permanently fixed and are
used as furnishings, decorations or for specialized purposes
{e.g., dentist chairs and dental treatment units, counters,
laboratory benches bolted to the floor, dishwashers, and
carpeting). Such equipment and assets will be considered as
not being permanently fixed to the building if they can be
removed without the need for costly or extensive alterations
or repairs to the building to make the space usable for
other purposes. Equipment and assets which meet these
criteria will be subject to the six and two-thirds percent
equipment use allowance.
(3) A reasonable use allowance may be
negotiated for any assets that are considered to be fully
depreciated, after taking into consideration the amount of
depreciation previously charged to the Government, the
estimated useful life remaining at the time of negotiation,
the effect of any increased maintenance charges, decreased
efficiency due to age, and any other factors pertinent to
the utilization of the asset for the purpose contemplated.
d.	Except as otherwise provided in b and c above, a.
combination of the depreciation and use allowance methods
may not be used, in like circumstances, for a single class
of assets (e.g., buildings, office equipment, and computer
equipment).
e.	Charges for use. allowances or depreciation must
be supported by adequate property records, and physical
inventories must be taken at least once every two years to
ensure that the assets exist and are usable, used, and
needed. .Statistical sampling techniques may be used in
taking these inventories. In addition, when the
depreciation method is used, adequate depreciation records
showing the amount of depreciation taken each period must
also be maintained.
10.	Donated services and property. The value of donated
services and property are not allowable either as a direct
or indirect cost, except that depreciation or use allowances
on donated assets are permitted in accordance with Section
J9a. The value of donated services and property may be used
to meet cost sharing or matching requirements, in accordance
with OMB Circular No. A-110.
11.	Employee morale, health, and welfare costs and
credits. The costs of house publications, health or first-
aid clinics and/or infirmaries, recreational activities,
(No. A-21)
-------
30
employees' counseling services, and other expenses incurred
in accordance with the institution's established practice or
custom for the improvement of working conditions, employer-
employee relations, employee morale, and employee
performance, are allowable. Income generated from any of
these activities will be credited to the cost thereof unless
such income has been irrevocably set over to employee
welfare organizations.
12.	Entertainment costs. Costs incurred for amusement,
social activities, entertainment, and any items relating
thereto, such as meals, lodging, rentals, transportation,
and gratuities, are unallowable.
13.	Equipment and other capital expenditures.
a. For purposes of this paragraph, the following
definitions apply:
'(1) Equipment means an article of nonexpendable
tangible personal property having a useful life of more than
two years, and an acquisition cost of 5500 or more per unit.
However, consistent with institutional policy, lower limits
may be established.
(2)	Capital expenditure means the cost of the
asset including the cost to put it in place. Capital
expenditure for equipment, for example, means the net.
invoice price of the equipment, including the cost of any
modifications, attachments, accessories, or auxiliary
apparatus necessary to make it usable for the purpose for
which it is acquired. Ancillary charges, such as taxes,
duty, protective intransit insurance, freight, and
installation may be included in, or excluded from, capital
expenditure cost in accordance with the institution's
regular accounting practices.
(3)	Special purpose equipment means equipment
which is used only for research, medical, scientific, or
other technical activities.
(4)	General purpose equipment means equipment,
the use of which is not limited only to research, medical,
scientific or other technical activities. Examples of
general purpose equipment include office equipment and
furnishings, air conditioning equipment, reproduction and
printing equipment, motor vehicles, and automatic data
processing equipment.
(No. A-21)
-------
31
b. The following rules of allowability shall apply
to equipment and other capital expenditures:
(1)	Capital expenditures for general purpose
equipment, buildings, and land are unallowable as direct
charges, except where approved in advance by the sponsoring
agency.
(2)	Capital expenditures for special purpose
equipment are allowable as direct charges, provided that the
acquisition of items having a unit cost of SI,000 or more is
approved in advance by the sponsoring agency.
(3)	Capital expenditures for improvements to
land, buildings, or equipment which materially increase
their value or useful life are unallowable as direct
charges, except where approved in advance by the sponsoring
agency.
(4)	Capital expenditures are unallowable as
indirect costs. But see Section J9 for allowability of
depreciation or use allowance on buildings, capital
improvements, and equipment. Also see Section J33 for
allowability of rental* costs on land, buildings, and
equipment.
14.	Fines and penalties. Costs resulting from
violations or, or failure of the institution to comply with,
Federal, State, and local laws and regulations are
unallowable, except when incurred as a result of compliance
with specific provisions of the sponsored agreement, or
instructions in writing from the contracting officer or
equivalent.
15.	Fringe benefits.
a.	Fringe benefits in the form of regular
compensation paid to employees during periods of authorized
absences from the job, such as for annual leave, sick leave,
military leave, and the like, are allowable, provided such
costs are distributed to all institutional activities in
proportion to the relative amount of time or effort actually
devoted by the employees. See Section J35 for treatment of
sabbatical leave.
b.	Fringe benefits in the form of employer
contributions or expenses for social security, employee
insurance, workmen's compensation insurance, tuition or
remission of tuition for individual employees or their
(No. A-21)
-------
32
families and the like are allowable, provided such benefits
are granted in accordance with established institutional
policies, and are distributed to all institutional
activities on an equitable basis. See Section J36b for
treatment of tuition remission provided to students.
c.	Rules for pension plan costs are as follows:
(1)	Costs of the institution's pension plan
which are incurred in accordance with the established
policies of the institution are allowable, provided (a) such
policies meet the test of reasonableness; (b) the methods of
cost allocation are equitable for all activities; (c) the
amount of pension cost assigned to each fiscal year is
determined in accordance with (2) below; and (d) the cost
assigned to a given fiscal year is paid or funded for all
plan participants within six months after the end of that
year.*
(2)	The amount of pension cost assigned to each
fiscal year shall be determined in accordance with generally
accepted accounting principles. Institutions may elect to
follow the "Cost Accounting Standard for Composition and
Measurement of Pension Cost" (4 CFR Part 412).
(3)	Premiums paid for pension plan termination
insurance pursuant to the Employee Retirement Income
Security Act of 1974 (Public Law 93-406) are allowable.
Late payment charges on such premiums are unallowable.
Excise taxes on accumulated funding deficiencies and
prohibited transactions of pension plan fiduciaries imposed
under the Employee Retirement Income Security Act are also
unallowable.
d.	Fringe benefits may be assigned to cost
objectives by identifying specific benefits to specific
individual employees or by allocating on the basis of the
salaries and wages of the employees receiving the benefits.
When the allocation method is used, separate allocations
must be made to selective groupings of employees, if the
costs in relationship to salaries and wages differ
significantly for different groups of employees. Also
fringe benefits related to institutional salaries and wages
treated as direct costs may be treated as direct costs.
16. Insurance and indemnification.
(No. A-21)
-------
33
a.	Costs of insurance required or approved, and
maintained, pursuant to the sponsored agreement, are
allowable.
b.	Costs of other insurance maintained by the
institution in connection with the general conduct of its
activities, are allowable subject to the following
limitations: (1) types and extent and cost of coverage must
be ¦ in accordance with sound institutional practice; (2)
costs of insurance or of any contributions to any reserve
covering the risk of loss of or damage to Government-owned
property are unallowable, except to the extent that the
Government has specifically required or approved such costs;
and (3) costs of insurance on the lives of officers or
trustees are unallowable except where such insurance is part
of an employee plan which is not unduly restricted.
c.	Contributions to a reserve for a self-insurance
program are allowable, to the extent that the types of
coverage, extent of coverage, and the rates and premiums
would have been allowed had insurance been purchased to
cover the risks.
d.	Actual losses which could have been covered by
permissible insurance (whether through purchased insurance
or self-insurance) are unallowable, unless expressly
provided for in the sponsored agreement, except that costs
incurred because of losses not covered under existing
deductible clauses for insurance coverage provided in
keeping with sound management practice as well as minor
losses not covered by insurance, such as spoilage, breakage
and disappearance of small hand tools, which occur in the
ordinary course of operations, are allowable.
e.	Indemnification includes securing the
institution against liabilities to third persons and other
losses not compensated by insurance or otherwise. The
Government is obligated to indemnify the institution only to
the extent expressly provided for in the sponsored
agreement, except as provided in d above.
17. Interest, fund raising, and investment management
costs.
a. Costs incurred for interest on borrowed capital
or temporary use of endowment funds, however represented,
are unallowable.
(No. A-21)
-------
34
b.	Costs of organized fund raising, including
financial campaigns, endowment drives, solicitation of gifts
and bequests, and similar expenses incurred solely to raise
capital or obtain contributions, are unallowable.
c.	Costs of investment counsel and staff and
similar expenses incurred solely to enhance income from
investments are unallowable.
d.	Costs related to the physical custody and
control of monies and securities are allowable.
18.	Labor relations costs. Costs incurred in
maintaining satisfactory relations between the institution
and its employees, including costs of labor management
committees, employees' publications, and other related
activines, are allowable.
19.	Losses on other sponsored agreements or contracts.
Any excess of costs over income under any other sponsored
agreement or contract of any nature is unallowable. This
includes, but is not limited to, the institution's
contributed portion by reason of cost-sharing agreements or
any under-recoveries through negotiation of flat amounts for
indirect costs.
20.	Maintenance and repair costs. Costs incurred for
necessary maintenance, repair or upkeep of property
(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.
21.	Material costs. Costs incurred for purchased
materials, supplies, and fabricated parts directly or
indirectly related to the sponsored agreement, are
allowable. Purchases made specifically for the sponsored
agreement should be charged thereto at their actual prices
after deducting all cash discounts, trade discounts,
rebates, and allowances received by the institution.
Withdrawals from general stores or stockrooms should be
charged at their cost under any recognized method of pricing
stores withdrawals conforming to sound accounting practices
consistently followed by the institution. Incoming
transportation charges are a proper part of material cost.
Direct material cost should include only the materials and
supplies actually used for the performance of the sponsored
agreement, and due credit should be given for any excess
materials retained, or returned to vendors. Due credit
(No. A-21)
-------
35
should be given for all proceeds or value received for any
scrap resulting from work, under the sponsored agreement.
Where Government-donated or furnished material is used in
performing the sponsored agreement, such material will be
used without charge.
22.	Memberships, subscriptions and professional activity
costs.
a.	Costs of the institution's membership in civic,
business, technical, and professional organizations are
allowable.
b.	Costs of the institution's subscriptions to
civic, business, professional, and technical periodicals are
allowable.
c.	Costs of meetings and conferences, when the
primary purpose is the dissemination of technical
information, are allowable. This includes costs of meals,
transportation, rental of facilities, and other items
incidental to such meetings or conferences.
23.	Patent costs. Costs of preparing disclosures,
reports, and otner documents 'required by the sponsored
agreement, and of searching the art to the extent necessary
to make such invention disclosures, are allowable, In
accordance with the clauses of the sponsored agreement
relating to patents, costs of preparing documents and any
other patent costs, in connection with the filing of a
patent application where title is conveyed to the
Government, are allowable. (See also Section J34.)
24.	Plant security costs * Necessary expenses incurred
to comply vitH security requirements, including wages,
uniforms and equipment of personnel engaged in plant
protection, are allowable.
25.	Preagreement costs. Costs incurred prior to the
effectivi date of the sponsored agreement, whether or not
they would have been allowable thereunder if incurred after
such date, are unallowable unless approved by the sponsoring
agency.
26.	Professional services costs.
a. Costs of professional services rendered by the
members of a particular profession who are not employees of
the institution are allowable, subject to b and c below,
(No. A-21)
-------
36
when reasonable in relation to the services rendered and
when not contingent upon recovery of the costs from the
.Government. Retainer fees to be allowable must be
.reasonably supported by evidence of services rendered.
b.	Factors to be considered in determining the
allowability of costs in a particular case include (1) the
past pattern of such costs, particularly in the years prior
to the award of sponsored agreements; (2) the impact of
sponsored agreements on the institution's total activity;
(3) the nature and scope of managerial services expected of
the institution's own organizations; and (4) whether the
proportion of Government work to the institution's total
activity is such as to influence the institution in favor of
incurring the cost, particularly where the services rendered
are not of a continuing nature and have little relationship
to work under sponsored agreements.
c.	Costs of legal, accounting, and consulting
services, and related costs, incurred in connection with the
prosecution of claims against the Government, are
unallowable. Costs of legal, accounting and consulting
services, and related costs, incurred in connection with
patent infringement litigation, are unallowable unless
otherwise provided for in the sponsored agreements.
27.	Profits and losses on disposition of plant equipment
or other capital assets. Profits or losses arising from the
sale or exchange of plant, facilities, equipment or other
capital assets, including sale or exchange of either short-
term or long-term investments, shall not be considered in
computing the costs of sponsored agreements except for
pension plans as provided in Section J15c. When assets
acquired with Federal funds, in part or wholly, are disposed
of, the distribution of the proceeds shall be made in
accordance with Attachment N, OMB Circular No. A-110.
28.	Proposal costs. Proposal costs' are the costs of
preparing bids or proposals on potential Government and
nongovernment sponsored agreements or projects, including
the development of data necessary to support the
institution's bids or proposals. Proposal costs of the
current accounting period of both successful and
unsuccessful bids and proposals normally should be treated
as indirect costs and allocated currently to all activities
of the institution, and no proposal costs of past accounting
periods will be allocable to the current period. However,
the institution's established practices may be to treat
proposal costs by some other recognized method. Regardless
(No. A-21)
-------
37
of the method used, the results obtained may be accepted
only if found to be reasonable and equitable.
29.	Public information services costs.	Cost of news
releases pertaining to specific research	or scientific
accomplishment are allowable, when they	result from
performance of sponsored agreements.
30.	Rearrangement and alteration costs. Cost incurred
for ordinary or normal rearrangement and alteration of
facilities are allowable. Special arrangement and
alteration costs incurred specifically for the project are
allowable when such work has been approved in advance by the
sponsoring agency.
31.	Reconversion costs. Costs incurred in the
restoration or rehabilitation of the institution's
facilities to approximately the same condition existing
immediately prior to commencement of a sponsored agreement,
fair wear and tear excepted, are allowable.
32.	Recruiting costs.
a. Subject to b, c, and d below, and provided that
the size of the staff recruited and maintained is in keeping
with workload requirements, costs of "help wanted"
advertising, operating costs of an employment office
necessary to secure and maintain an adequate staff, costs of
operating an aptitude and educational testing program,
travel costs 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, are allowable to
the extent that such costs are incurred pursuant to a well
managed recruitment program. Where the institution uses
employment agencies, costs not in excess of standard
commercial rates for such services are allowable.
b.	In publications, costs of help wanted
advertising that includes color, includes advertising
material for other than recruitment purposes, or is
excessive in size (taking into consideration recruitment
purposes for which intended and normal institutional
practices in this respect), are unallowable.'
c.	Costs of help wanted advertising, special
emoluments, fringe benefits, and salary allowances incurred
to attract professional personnel from other institutions
that do not meet the test of reasonableness or do not
(No. A-21)
-------
38
conform with the established practices of the institution,
are unallowable.
d. Where relocation costs incurred incident to
recruitment of a new employee have been allowed either as an
allocable direct or indirect cost, and the newly hired
employee resigns for reasons within his control within
twelve months after hire, the institution will be required
to refund or credit such relocation costs to the Government.
33. Rental cost of buildings and equipment.
a.	Rental costs	of buildings or equipment are
allowable to the extent	that the decision to rent or lease
is in accord with Section	C-3. Rental arrangements should
be reviewed periodically	to determine if circumstances have
changed and other options	are available.
b.	Rental costs under "sale and lease back"
arrangements are allowable only up to the amount that would
be allowed if the institution continued to own the property.
c.	Rental costs under "less-than-arms-length"
leases are allowable only up to the amount that would be
allowed if the institution owned the property. For this
purpose, a less-than-arms-length lease is one under which
one party to the lease agreement is able to control or
substantially influence the actions of the other,
d.	Where significant rental costs are incurred
under leases which create a material equity in the leased
property, they are allowable only up to the amount that
would be allowed if the institution purchased the property
on the date the lease agreement was executed. For this
purpose, a material equity in the property exists when the
lease:
(1)	is noncancelable or is cancelable only upon
the occurrence of some remote contingency, and
(2)	has one or more of the following
characteristics:
(a)	Title to the property ' passes to the
institution at some time during or after the lease period.
(b)	The term of the lease corresponds
substantially to the estimated useful life of the property
(No. A-21)
-------
39
(i.e., the period of economic usefulness to the legal owner
of the property).
(c)	The initial term is less than the
useful life of the property and the institution has the
option to renew the lease for the remaining useful life at
substantially less than fair rental value.
(d)	The property was acquired by the
leasor to meet the special needs of the institution and will
probably be usable only for that purpose and only by the
institution.
(e)	The institution has the right, during
or at the expiration of the lease, to purchase the property
at a price which at the inception of the lease appears to be
substantially less than the probable fair market value at
the time it is permitted to purchase the property (commonly
called a lease with a bargain purchase option), except for
any discount normally given to educational institutions.
34.	Royalties and other costs for use of patents.
Royalties on a patent or amortization or Uie cost of
acquiring a patent or invention or rights thereto, necessary
for the proper performance of the sponsored agreement and
applicable to . tasks or processes thereunder, are allowable
unless the Government has a license or the right to free use
of the patent, the patent has been adjudicated to be invalid
or has been administratively determined to be invalid, the
patent is considered to be unenforceable, or the patent has
expired.
35.	Sabbatical leave costs. Costs of leave of absence
by employees for performance of graduate work or sabbatical
study, travel, or research are allowable provided the
institution has a uniform policy on sabbatical leave for
persons engaged in instruction and persons engaged in
research. Such costs will be allocated on an equitable
basis among all related activities of the institution.
Where sabbatical leave is included in fringe benefits for
which a cost is determined for assessment as a direct
charge, the aggregate amount of such assessments applicable
to all work of the institution during the base period must
be reasonable in relation to the institution's actual
experience under its sabbatical leave policy.
36.	Scholarships and student aid costs.
(No. A-21)
-------
40
a.	Costs'of scholarships, fellowships, and other
programs of student aid are allowable only when the purpose
of the sponsored agreement is to provide training to
selected participants and the charge is approved by the
sponsoring agency. However, tuition remission and other
forms of compensation paid as, or in lieu of, wages to
students performing necessary work are allowable provided
that (1) there is a bonafide employer-employee relationship
between the student and the institution for the work
performed, (2) the tuition or other payments are reasonable
compensation for the work performed and are conditioned
explicitly upon the performance of necessary work, and (3)
it is the institution's practice to similarly compensate
students in nonsponsored as well as sponsored activities.
b.	Charges for tuition remission and other forms of
compensation paid to students as, or in lieu of, salaries
and wages shall be subject to the reporting requirements
stipulated in Section J6, and shall be treated -as direct or
indirect cost in accordance with the actual work being
performed. Tuition remission may be charged on an average
rate basis.
37. Severance pay.
a.	Severance pay is compensation in addition to
regular salary and wages which is paid by an institution to
employees whose services are being terminated. Costs of
severance pay are allowable only to the extent that such
payments are required by law, by employer-employee
agreement, by established policy that constitutes in effect
an implied agreement on the institution's part, or by
circumstances of the particular employment.
b.	Severance payments that are due to normal
recurring turnover and which otherwise meet the conditions
of a above may be allowed provided the actual costs of such
severance payments are regarded as expenses applicable to
the current fiscal year and are equitably distributed among
the institution's activities during that period.
c.	Severance payments that are due to abnormal or
mass terminations are of such conjectural nature that
allowability must be determined on a case-by-case basis.
However, the Government recognizes its obligation to
participate, to the extent of its fair share, m any
specific payment.
(No. A-21)
-------
41
38.	Specialized service facilities.
a.	The costs of institutional services involving
the use of highly complex or specialized facilities such as
electronic computers, wind tunnels, and reactors are
allowable, provided the charge for the service meets the
conditions of b through d below.
b.	The cost of each service normally shall consist
of both its direct costs and its allocable share of indirect
costs with deductions for appropriate income or Federal
financing as described in Section C5.
c.	The cost of such institutional services when
material in amount will be charged directly to users,
including sponsored agreements based on actual use of the
services and a schedule of rates that does not discriminate
between federally and nonfederally supported activities of
the institution, including use by the institution for
internal purposes. Charges for the use of specialized
facilities should be designed to recover not more than the
aggregate cost of the services over a long-term period
agreed to by the institution and the congnizant Federal
agency. Accordingly, it is not necessary that the rates
charged for services be equal to the cost of providing those
services during any one fiscal year as long as rates are
reviewed periodically for consistency with the long-term
plan and adjusted if necessary.
d.	Where the costs incurred for such institutional
services are not material, they may be allocated as indirect
costs. Such arrangements must be agreed to by the
institution and the cognizant Federal agency.
e.	Where it is in the best interest of the
Government and the institution to establish alternative
costing arrangements, such arrangements may be worked out
with the cognizant Federal agency.
39.	Special services costs. Costs incurred for general
public relations activities, alumni activities, and similar
services, are unallowable;
40.	Student activity costs. Costs incurred for
intramural activities, student publications, student clubs,
and other student activities, are unallowable, unless
specifically provided for in the sponsored agreements.
-------
42
41.	Taxes.
a.	In general, taxes which the institution is
required to pay and which are paid or accrued in accordance
with generally accepted accounting principles are allowable.
Payments made to local governments in lieu of taxes which
are commensurate with the local government services received
are allowable, except for (1) taxes from which exemptions
are- available to the institution directly or which are
available to the institution based on an exemption afforded
the Government, and in the latter case when the sponsoring
agency makes available the necessary exemption certificates;
and (2) special assessments on land which represent capital
improvements.
b.	Any refund of taxes, interest, or penalties, and
any payment to the institution of interest thereon,
attributable to taxes, interest, or penalties which were
allowed as sponsored agreement costs, will be credited or
paid to the Government in the manner directed by the
Government. However, any interest actually paid or credited
to an institution incident to a refund of tax, interest, and
penalty will be paid or credited to the Government only to
the extent that such interest accrued over the period during
which the institution had been reimbursed by the Government
for the taxes, interest, and penalties.
42.	Transportation costs. Costs incurred for freight,
express, cartage, postage, and other transportation services
relating either to goods purchased, in process, or
delivered, are allowable. When such costs can readily be
identified with the items involved, they may be charged
directly as transportation costs or added to the cost of
such items. Where identification with the materials
received cannot readily be made, inbound transportation
costs may be charged to the appropriate indirect cost
accounts if the institution follows a consistent, equitable
procedure in this respect. Outbound freight, if
reimbursable under the terms of the sponsored agreement,
should be treated as a direct cost.
43.	Travel costs.
a. Travel costs are the expenses for
transportation, lodging, subsistence, and related items
incurred by employees who are in travel status on official
business of the institution. Such costs may be charged on
an actual basis, on a per diem or mileage basis in lieu of
actual costs incurred, or on a combination of the two,
(No. A-21)
-------
43
provided the method used is applied to an	'entire trip and
not to selected days of the trip, and	results in charges
consistent with those normally allowed by the institution in
its regular operations.
b.	Travel costs are allowable subject to c, d, e,
and f below, when they are directly attributable to specific
work under a sponsored agreement or are- incurred in-the
normal course of administration of the institution or a
department or program thereof.
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 less than
first-class accommodations would (1) require circuitous
routing, (2) require travel during unreasonable hours, (3)
greatly increase the duration of the flight, (4) result in
additional costs which would offset the transportation
savings, or (5) offer accommodations which are not
reasonably adequate for the medical needs of the traveler.
d.	Costs of personnel movements of a special or
mass nature are allowable only when authorized or approved
in writing by the sponsoring agency or its authorized
representative.
e.	Foreign travel costs are allowable only when the
travel has received specific prior approval. Each separate
foreign trip must be specifically approved. For purposes of
this provision, foreign travel is defined as any travel
outside of Canada and the United States and its territories
and possessions. However, for an organization located
outside Canada and the United States and its territories and
possessions, foreign travel means travel outside that
country.
f.	Domestic travel costs are allowable when
permitted by the sponsored agreement. Expenditures for such
travel will not be allowed if they exceed the amount
specified by more than 25% or $500, whichever is greater,
except with an advanced approval of the sponsoring agency.
44. Termination costs applicable to sponsored
agreements.
a. Termination of sponsored agreements generally
gives rise to the incurrence of costs or to the need for
(No. A-21)
-------
44
special treatment of costs, which would not have arisen had
the agreement not been terminated. Items peculiar to
termination are set forth below. They are to be used in
conjunction with all other provisions of this Circular in
the case of termination.
b.	The cost of common items of material reasonably
usable on the institution's other work will not be allowable
unless the institution submits evidence that it could net
retain such items at cost without sustaining a loss. In
deciding whether such items are reasonably usable on other
work of the institution, consideration should be given to
the institution's plans and orders for current and scheduled
work. Contemporaneous purchases of common items by the
institution will be regarded as evidence that such items are
reasonably usable on the institution's other work. Any
acceptance of common items as allowable to the terminated
portion of the agreement should be limited to the extent
that the quantities of such items on hand, m transit, and
on order are m excess of the reasonable quantitative
requirements of other work.
c.	If in a particular case, despite all reasonable
efforts by the institution, 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 institution to discontinue such costs
will be considered unacceptable.
d.	Loss of useful value of special tooling, and
special machinery and equipment is generally allowable,
provided (1) such special tooling, machinery, or equipment
is not reasonably capable of use in the other work of the
institution; (2) the interest of the Government is protected
by transfer of title or by other means deemed appropriate by
the contracting officer or equivalent; and (3) the loss of
useful value as to any one terminated agreement is limited
to that portion of the acquisition cost which bears the same
ratio to the total acquisition cost as the terminated
portion of the agreement bears to the entire terminated
agreement and other Government agreements for which the
special tooling, special machinery, or equipment was
acquired.
e.	Rental costs under unexpired leases are
generally allowable where clearly shown to have been
reasonably necessary for the performance of the terminated
(No. A-21)
-------
45
agreement, less the residual value of such leases, if (1)
the amount of such rental claimed does not exceed the
reasonable use value of the property leased for the period
of the agreement and such further period as may be
reasonable; and (2) the institution makes all reasonable
efforts to terminate, assign, settle, or otherwsie reduce
the cost of such lease. There also may be included the cost
of alterations of such leased property, • provided such
alterations were necessary for the performance of the
agreement, and of reasonable restoration required by the
provisions of the lease.
f.	Settlement expenses including the following are
generally allowable: (1) accounting, legal, clerical, and
similar costs reasonably necessary for the preparation and
presentation to contracting officers or equivalent of
settlement claims and supporting data with respect to the
terminated portion of the agreement, and the termination and
settlement of subagreements; and (2) reasonable costs for
the storage, transportation, protection, and disposition of
property provided by the Government or acquired or produced
by the institution for the agreement, except when the
institution is reimbursed for disposals at a predetermined
amount in accorandance with the provisions of Circular No.
A-110.
g.	Claims under subagreements, including the
allocable portion of claims which are common to the
agreement and to other work of the institution, are
generally allowable.
K. Certification of charges. To assure that expenditures
for sponsored agreements are proper and in accordance with
the agreement documents and approved project budgets, the
annual and/or final fiscal reports or vouchers requesting
payment under the agreements will include a certification,
signed by an authorized official of the university, which
reads essentially as follows: "I certify that all
expenditures reported (or payment requested) are for
appropriate purposes and in accordance with the provisions
of the application and award documents."
(No. A-21)
-------
EXECUTIVE OFFICE OF THE PRESIDENT
OFFICE OF MANAGEMENT AND BUDGET
WASHINGTON. D.C. asn
July 23, 1982
CIRCULAR NO. A-21
Revised
Transmittal Memorandum No. 1
TO THE HEADS OF EXECUTIVE DEPARTMENTS AND ESTABLISHMENTS
This Transmittal Memorandum revises OMB Circular No. A-21,
"Cost principles for educational institutions."
The revision changes the procedures covering allocation of
personal service costs and recognizes interest costs in
certain circumstances.
SUBJECT: Cost principles for universities
David A. Stockman
Director
Attachment
-------
EXECUTIVE OFFICE OF THE PRESIDENT
OFFICE OF MANAGEMENT AND BUDGET
WASHINGTON, D.C. 20503
July 28, 198 2
MEMORANDUM
SUBJECT:
FROM:
Circular A-21, V,ost principles for
educational institutions"
JOHN J. LORDAN
V,oSt
Enclosed is an advance copy of revisions that have been made to
Circular A-21, "Cost principles for educational institutions."
The revisions were approved by the Director on July 23, 198 2, and
are expected to be published in the Federal Register in about a
week.
As you know, the revisions pertaining to personal service costs
are based on recommendations of a university group composed of
representatives from the Association of American Universities and
Council of Scientific Society Presidents. It gives universities
more flexibility in selecting the method to be used in accounting
for salary costs, but still provides strict accountability for
Federal funds. The revised Circular also makes allowable interest
costs related to newly constructed or acquired buildings, major
building renovations, and major equipment purchases.
Enclosure
-------
EXECUTIVE OFFICE OF THE PRESIDENT
OFFICE OF MANAGEMENT AND BUDGET
WASHINGTON, D.C. 20003
Circular A-21 - Cost Principles for Educational Institutions
Circular A-21 is revised as follows:
Paragraph B.I.
The following replaces section B.1:
B. Definition of Terms
1. Major functions of an institution refers to instruction,
organized research, other sponsored activities, and other institu-
tional activities as defined below:
a. Instruction means the teaching and training activities
of an institution. Except for research training as provided in c.
below, this term includes all teaching and training activities,
whether they are offered for credits toward a degree or certifi-
cate or on a non-credit basis, and whether they are offered
through regular academic departments or separate divisions, such
as a summer school division or an extension division. Also con-
sidered part of this major function are departmental research,
and, where agreed to, university research.
-------
2
(1)	Sponsored .instruction and training means specific
instructional or training activity established by grant, contract,
or cooperative agreement. For purposes of the cost principles,
this activity may be considered a major function even though an
institution's accounting treatment may include it in the instruc-
tion function.
(2)	Departmental research means research development
and scholarly activities that are not organized research and, con-
sequently, are not separately budgeted and accounted for. Depart-
mental research, for purposes of this document, is not considered
as a major function, but as a part of the instruction function of
the institution.
b. Organized research means all research and development
activities of an institution that are separately budgeted and
accounted for. It includes:
(1) Sponsored research means all research and develop-
ment activities that are sponsored by Federal and non-Federal
agencies and organizations. This term includes activities invol-
ving the training of individuals in research techniques (commonly
called research training) where such activities utilize the same
facilities as other research and development activities and where
such activities are not included in the instruction function.
-------
3
(2) Oniversity research means all research and devel-
opment activities that are separately budgeted by the institution
under an internal application of institutional funds. Oniversity
research, for purposes of this document, may be considered a part
of the instruction function, or may be combined with sponsored
research under the function of organized research, or may be
treated as a separate major function, as agreed to with the cogni-
zant agency.
c.	d. becomes c.
d.	e. becomes d.
Paragraph J. 6.
The following replaces sections J. 6. b. through d.
J. Compensation for Personal Services
6. b. (1) General Principles
(a) The distribution of salaries and wages,
whether treated as direct or indirect costs, will be based on pay-
rolls documented in accordance with the generally accepted prac-
tices of colleges and universities. Institutions may include in a
residual category all activities that are not directly charged to
-------
4
sponsored agreements, and that need not be distributed to more
than one activity for purposes of identifying indirect costs and
the functions to which they are allocable. The components of the
residual category are not required to be separately documented.
(b)	The apportionment of employees' salaries and
wages which are chargeable to more than one sponsored agreement or
other cost objective will be accomplished by methods which will
(1) be in accordance with Sections A-2 and C above, (2) produce an
equitable distribution of charges for employees' activities, and
(3) distinguish the employees' direct activities from their
indirect activities.
(c)	In the use of any methods for apportioning
salaries,-it is recognized that, in an academic setting, teaching,
research, service, and administration are often inextricably
intermingled. A precise assessment of factors that contribute to
costs is not always feasible, nor is it expected. Reliance,
therefore, is placed on estimates in which a degree of tolerance
is appropriate.
(d)	There is no single best method for documenting
the distribution of charges for personal services.
Methods for apportioning salaries and wages, however, must meet
the criteria specified in J.6.b.(2) below. Examples of acceptable
-------
5
methods are contained in J.6.C. below. Other methods which meet
the criteria specfied in J.6.b.(2) below also shall be deemed
acceptable, if a mutually satisfactory alternative agreement is
reached.
(2) Criteria for Acceptable Methods
(a)	The payroll distribution system will (i) be
incorporated into the official records of the institution, (ii)
reasonably reflect the activity for which the employee is compen-
sated by the institution, and (iii) encompass both sponsored and
all other activities on an integrated basis, but may include the
use of subsidiary records. (Compensation for incidental work
described in J.6.a. need not be included.)
(b)	The method must recognize the principle of
after-the-fact confirmation or determination so that costs dis-
tributed represent actual costs, unless a mutually satisfactory
alternative agreement is reached.
Direct cost activities and indirect cost activities may be con-
firmed by responsible persons with suitable means of verification
that the work was performed. Confirmation by the employee is not
a requirement for either direct or indirect cost activities if
other responsible persons make appropriate confirmations.
-------
6
(c)	The payroll distribution system will allow
confirmation of activity allocable to each sponsored agreement and
each of the categories of activity needed to identify indirect
costs and the functions to which they are allocable. The activi-
ties chargeable to indirect cost categories or the major functions
of the institution for employees whose salaries must be appor-
tioned (see J.6.b.1.(b) above), if not initially identified as
separate categories, may be subsequently distributed by any
reasonable method mutually agreed to, including, but not limited
to, suitably conducted surveys, statistical sampling procedures,
or the application of negotiated fixed rates.
(d)	Practices vary among institutions and within
institutions as to the activity constituting a full workload.
Therefore, the payroll distribution system may reflect categories
of activities expressed as a percentage distribution of total
activities.
(e)	Direct and indirect charges may be made initi-
ally to sponsored agreements on the basis of estimates made before
services are performed. When such estimates are used, significant
changes in the corresponding work activity must be identified and
entered into the payroll distribution system. Short-term (such as
one or two months) fluctuation between workload categories need
not be considered as long as the distribution of salaries and
-------
7
wages is reasonable over the longer term, such as an academic
period.
(£) The system will provide for independent inter-
nal evaluations to ensure the system's effectiveness and compli-
ance with the above standards.
(g) For systems which meet these standards, the
institution will not be required to provide additional support or
documentation for the effort actually performed.
J. 6. c. Examples of Acceptable Methods for Payroll
Distribution:
1. Plan - Confirmation: Under this method, the distri-
bution of salaries and wages of professorial or professional staff
applicable to sponsored agreements is based on budgeted, planned,
or assigned work activity, updated to reflect any significant
changes in work distribution. A plan-confirmation system used for
salaries and wages charged directly or indirectly to sponsored
agreements will meet the following standards:
(a) A system of budgeted, planned, or assigned
work activity will be incorporated into the official records of
the institution and encompass both sponsored and all other activi-
-------
8
ties on an integrated basis. The system may include the use of
subsidiary records.
(b)	The system will reasonably reflect only the
activity for which the employee is compensated by the institution
(compensation for incidental work described in J.6.a. need not be
included). Practices vary among institutions and within institu-
tions as to the activity constituting a full workload. Hence, the
system will reflect categories of activities expressed as a per-
centage distribution of total activities. (But see Section H for
treatment of indirect costs under the simplified method for small
institutions.)
(c)	The system will reflect activity applicable to
each sponsored agreement and to each category needed to identify
indirect costs and the functions to which they are allocable. The
system may treat indirect cost activities initially within a
residual category and subsequently determine them by alternate
methods as discussed in J.6.b.(2)(c).
(d)	The system will provide for modification of an
individual's salary or salary distribution commensurate with any
significant change in the employee's work activity. Short-term
(such as one or two months) fluctuation between workload cate-
gories need not be considered as long as the distribution of
salaries and wages is reasonable over the longer term such as an
-------
9
academic period. Whenever it is apparent that a significant
change in work activity which is directly or indirectly charged to
sponsored agreements will occur or has occurred, the change will
be documented over the signature of a responsible official and
entered into the system.
(e)	At least annually a statement will be signed
by the employee, principal investigator, or responsible
official(s) using suitable means of verification that the work was
performed, stating that salaries and wages charged to sponsored
agreements as direct charges, and to residual, indirect cost or
other categories are reasonable in relation to work performed.
(f)	The system will provide for independent
internal evaluation to ensure the system's integrity and compli-
ance with the above standards.
(g)	In the use of this method, an institution
shall not be required to provide additional support or documenta-
tion for the effort actually performed.
2. After-the-fact Activity Records: Under this
system the distribution of salaries and wages by the institution
will be supported by activity reports as prescribed below.
-------
10
(a)	Activity reports will reflect the distribution
of activity expended by employees covered by the system (compensa-
tion for incidential work as described in J.6.a. need not be
included).
(b)	These reports will reflect an after-the-fact
reporting of the percentage distribution of activity of employees.
Charges may be made initially on the basis of estimates made
before the services are performed, provided that such charges are
promptly adjusted if significant differences are indicated by
activity records.
(c)	Reports will reasonably reflect the activities
for which employees are compensated by the institution. To con-
firm that the distribution of activity represents a reasonable
estimate of the work performed by the employee during the period,
the reports will be signed by the employee, principal investi-
gator, or responsible official(s) using suitable means of verifi-
cation that the work was performed.
(d)	The system will reflect activity applicable to
each sponsored agreement and to each category needed to identify
indirect costs and the functions to which they are allocable. The
system may treat indirect cost activities initially within a
residual category and subsequently determine them by alternate
methods as discussed in J.6.b.(2)(c).
-------
11
(e)	For professorial and professional staff, the
reports will be prepared each academic term, but no less fre-
quently than every six months. For other employees, unless alter-
nate arrangements are agreed to, the reports will be prepared no
less frequently than monthly and will coincide with one or more
pay periods.
(f)	Where the institution uses time cards or other
forms of after-the-fact payroll documents as original documenta-
tion for payroll and payroll charges, such documents shall qualify
as records for this purpose provided that they meet the require-
ments in (a) through (e) above.
3. Multiple Confirmation Records: Onder this system
the distribution of salaries and wages of professorial and profes-
sional staff will be supported by records which certify separately
for direct and indirect cost activities as prescribed below.
(a) For employees covered by the system, there
will be direct cost records to reflect the distribution of that
activity expended which is to be allocable as direct cost to each
sponsored agreement. There will also be indirect cost records to
reflect the distribution of that activity to indirect costs.
These records may be kept jointly or separately (but are to be
certified separately, see below).
-------
12
(b)	Salary and wage charges may be made initially
on the basis of estimates made before the services are performed
provided that such charges are promptly adjusted if significant
differences occur.
(c)	Institutional records will reasonably reflect
only the activity for which employees are compensated by the
institution (compensation for incidental work as described in
J.6.a. need not be included).
(d)	The system will reflect activity applicable to
each sponsored agreement and to each category needed to identify
indirect costs and the functions to which they are allocable.
(e)	To confirm that the distribution of activity
represents a reasonable estimate of the work performed by the
employee during the period, the record for each employee will
include:
(1)	The signature of the employee or of a
person having direct knowledge of the work, confirming that the
record of activities allocable as direct costs of each sponsored
agreement is appropriate.
(2)	The record of indirect costs will include
the signature of responsible person(s) who use suitable means of
-------
13
verification that the work was performed and is consistent with
the overall distribution of the employee's compensated
activities.
These signatures may all be on the same document.
(f)	The reports will be prepared each academic
term, but no less frequently than every six months.
(g)	Where the institution uses time cards or other
forms of after-the-fact payroll documents as original documenta-
tion for payroll and payroll charges, such documents shall qualify
as records for this purpose provided they meet the requirements in
(a) through (f) above.
RELATED CHANGES:
Change F.4.a.(2)(a) (in Departmental Administration Expenses),
sentence 2, to read:
Salaries of professorial and professional staff whose respon-
sibilities to the institution require administrative work that
benefits sponsored projects may also be included to the extent
that the portion charged to departmental administration is deter-
mined in accordance with Section J.6.
-------
14
Change P.5.a. (in Sponsored Projects Administration), sentence
3, to read:
The salaries of professorial and professional staff whose
responsibilities to the institution require administrative work
that benefits sponsored projects may also be included to the
extent that the portion charged to sponsored agreements adminis-
tration is determined in accordance with Section J.6.
Change F.7.a. (in Student Administration and Services),
sentence 2, to read:
The salaries of members of the academic staff whose responsi-
bilities to the institution require administrative work that bene-
fits sponsored projects may also be included to the extent that
the portion charged to Student Administration is determined in
accordance with Section J.6.
Delete J.6.C. Monitored Workload.
Delete J.6.d. Personnel Activity Reports.
Relabel J.6.e. as J.6.d.
Relabel J.6.f. as J.6.e.
-------
15
Paragraph J.17
Add at the end of section a., "except as indicated in e.
below."
Add a new section e., as follows:
J. 17. e. The cost of interest paid to an external party is
allowable where associated with the following assets, provided
the assets are used in support of sponsored agreements, and the
total cost (including depreciation or use allowance, operation and
maintenance costs, interest, etc.,) does not exceed the rental
cost of comparable assets in the same locality.
(1)	Buildings acquired or completed on or after
July 1, 1982.
(2)	Major reconstruction and remodeling of existing
buildings completed on or after July 1, 198 2.
(3)	Acquisition or fabrication of	capital equipment
(as defined in paragraph J.13, "Equipment and	other capital expen-
ditures") completed on or after July 1, 1982,	costing $10,000 or
more, if agreed to by the Government.
-------
MONTHLY TIME ACTIVITY
DATA COLLECTION SHEET
Last Name
1
.1.
Year Month
3	4
Activity
Identification
Code
Month
Week 3. Week 2 Week 3 Week 4 Week 5 Total
n
Q
] m
10
D CD ra &
10
10
10
10
10
10
10
10
10
10
10
13
10
D m m ED LQ
li
li
li
Totals
Activity
identification
Code
12
13
T
Sub-Activity Code
	Major Activity Code
-Division Code
a
14
15
Employee.
Date	
16
17
-------
20908
Federal Register / Vol. 51. No. TIP / Menday. fune 9. 19B8 / Notices
OFFICE OF MANAGEMENT ANO
BUDGET
Revision of 0M8 Circular A-21. "Cost
Principles for Educational Institutions"
agency: Office of Management and
Budget.
action; Notice of revision to OMQ
Circular A-21. "Cost Principles for
Educational Institutions".
summary: This ntoice rev ises OS!B
C.rcular A-21, "Cost Principles for
Educational Institution." This revis.on is
based on the numerous thoughtful
comments received in response to :he
proposed revision published for
comment in the February 12. 1988
Federal Register.
Effective July 1.1987. Circular A-21 is
revised to set a fixed overhead
allowance for the administration of
federally sponsored grants and
contracts by department heads and
faculty. The fixed allowance wiil equal 3
percent of modified total direct costs. No
faculty reporting will be required to
support the allowance. University
indirect cost rates will be the sum of the
rale negotiated for departmental
administration, the negotiated rates for
the remaining six cost pools, plus the 3
percent fixed allowance. The revision
takes effect on July 1.1987. lndivdual
Federal agencies may elect to utilize the
fixed allowance prior to July 1. 1987.
We agree with mjny of the comments
received during the 3 month consultation
with the university and scientific
community begun with the February 12.
1980 Federal Register notice. We have
refined the February 12:h proposal
accordingly. The final revision focuses
on the narrow area of departmental
administration. This area is cosdy to
document and subiect to considerable
audit controversy.
A fixed allowance for the salaries of
faculty and department heads engaged
in administrative activities which
support federally-funded research wiil
eliminate any Federal requirement for
faculty reporting to document overhead
allocations. The elimination of this
requirement will greatly reduce the
controversy among individual
researchers, their institutions, and the
Federal funding and audit agencies. In
addition, the allowance will restore, a
mure appropriate balance between
direct Federal research support and
overhead payments.
When auditional data become
available, we will cunsider an
adjustment to the 3 percent fixed rate
for departmental administration by
department heads and faculty. We are
also willing to consult further with
universities on ways to improve the
conduct of research.
Background
Prior to 1563. the Federal Covemment
used a fixed, national rate '.o establish
the amount of Federal pav rr.ents for
overhead allocated to federally
sponsored research. After the Federal
Covemment adopted the current policy
of negotiating individual cost-bated
requirement r3tes mth individual
universities. Federal overhead payments
increased from 22 percent of total
Federal research support to universilies
in 1S"0 to 24 percent in 1974 and 31
percent in l^AS.
T5".e disproportionate growth of
overhead payments has been recognized
as a threat :o maintaining appropriate
levels of research support. This growing
share of overhead payments has
provoked tensions within universities,
between scientists and administrators,
and between universities and Federal
funding and audit asenc.js.
The discussion of increasing overhead
payments resulted in a consensus
among Congress, the Ceneral
Accounting Office, the Inspector
Ceneral of the Department uf Health
and Human Services (HHS). the Office
of Science and Technology Policy, and
the White House Science Council on the
need for a govemir.ent-wide policy to
address the share of Federal university
research spending expended on
allocated overhead.
Congressional Directives
The FY82 Senate Labor/HHS
Appropriation report stated. "Should
inctrect costs continue :o increase as a
percentage of total costs, the amount of
money appropriated by the Congress
will finance less and less actual
research." (Report 97-288. p. 48) The
House Appropriations subcommittee on
Labor/HHS. expressing itself in its FY83
report (House Report 98-911. p. 31). held
that allocated overhead should be
addressed through a government-wide
plan-. In the conference report for the
RY86 Labor/HHS appropriation bill
(House Report 99-WZ. p. 28|. Congress
stated that containing research costs
and payments for allocated overhead
should be a high priority of all executive
branch agencies.
Crneral Accounting Office
In the 1984 report. "Assuring
Reasonableness of Rising Indirect Costs
on NIH Research C.-ints—A Difficult
Problem." (CAO/I !RO-fW-3| the
Ceneral Accounting Office fuund that
university allocations of departmental
adminsitr.ition overhead to federally
sponsored research are subjective and
difficult toverifv. The Ceneral
Accounting Office also found that: first,
current A-t2 allocation cntcrrn give
universities broad discretion in
allocation of overhead to Federal
research grants and. second,
universities' overhead allocations are
rarely audited by HHS. which sets
overhead pavment rates for 98 percent
of the umversices receiving Federal
research grants.
The Cer.cral Accounting Office
recommended that OMB revise A-21 to
limit overhead allocations to a fixed
percentage of depar.T.sntal
administration expenses, thus ensuring
reasonable reimbursement for overhead
and a reduction of universities'
accounting and reporting burden.
HHS Inspector General
In December. 1985. the HHS Inspector
Ceneral published the report. "The
Impact of Indirect Costs on Research
Sponsored by the Federal Covemment
at Universities and Colleges." The report
recommended a 7 percent fixed
allowance for all departmental
administration overhead allocated to
federally sponsored research. The 7
percent fixed allowance applied to the
entire departmental administration
pool—deans, department heads, faculty,
clerical support, and miscellaneous
overhead.
In a sample of 13 research
universities, the HHS Inspector Ceneral
found that faculty administration (and
the associated salaries) tends primarily
to benefit instrccnon and not federally
sponsored research—and recommended
that no allowance be made fi»r such
salaries. The HHS Inspector General
also found that clencal support which
ought properly to be allocated to
instruction and other institutional
activities is being charged to federally
sponsored research—and recommended
that a fixed allowance be established
for such support achvities. In the view
of the HHS Inspector General. OMB
Circular A-21 lacks clear criteria for
allocation of departmental
administration overhead to federally
sponsored -esearch. particularly with
respect to '-"ie allocation guidelines for
faculty saianes.
-------
Federal Register / Vol. 51. No. 110 f Monday. June 9. 1986 I Notices
20909
Office of Science and Technology Policy
The Office of Science and Technology
recommended last fall that a single fixed
rate for all allocated administrative
overhead, based on a five year average,
be phased in over two years. In addition
to restoring the balance between direct
Federal research support and overhead
payments, the Office of Science and
Technology Policy argued that the plan
would eliminate the need for faculty
activity reporting to document
university allocations of faculty and
department heads salanes to federally
sponsored research.
Packard-Brorr.'.ey Panei
On May 13.1986. the While House
Science Council released the report of
the Panel on the Health of U.S. Colleges
and Universities. Among i:s numerous
recommendations, the Panel
recommended a fi.\ed. national rate for
allocated administrative overhead. The
Panel proposed to phase-in the national
rates over two years. The Panel also
proposed: [1) Elimination of faculty
reporting :o document overhead
allocations. (2) peer review of allocated
overhead as well as direct costs. (3)
increases in use allowances for facilities
and equipment, and (4) reductions of
Federal administrative burdens.
Proposed Revision of February 12.1386
On February 12.1966. OMB proposed
to phase-in a fixed rate for
administrative allocated overhead to:
first, reduce the controversy among
researchers, their institutions, and
Federal funding and auditing agencies
and. second, restore an aopropriate
balance between direct Federal research
support and overhead payments. This
proposal followed up on Congress"
directive to address the growth of
overhead payments, ana was based on
recommendation* of the General
Accounting Office, the HHS Inspector
General, and the Office of Science and
Technology Policy to set a fixed rate for
a subset of the overhead categories. The
proposal also adopted the HHS
Inspector Ceneral's specific
recommendation to reduce
administrative overhead rates from the
current national average.
Comments oo the February 13b
Proposal
Over 300 comments were received in
response to the February I2ih
publication. The major comments were:
Comment: Due to organizational
differences, some universities charve
clerical support as allocated overhead
while otners charge it as a direct cost.
The February 12th proposfd revision
would impact more heavily on
universities which charge clerical
support as allocated overhead.
Response: We agree. In lient of these
legitimate organizational differences, a
more selective approach is preferable to
the February 12:n proposal. We have
accordingly focused the fixed allowance
on salanes of faculty and department
heads. This will avoid disruption !o the
organizational arrangements of
universities and will not restrict the
allocation of clerical support costs.
Comment: Set payments for faculty
administrative efforts at a fixed
percentage of faculty salanes.
Respor.se: We agree conceptually
with this approach. The revision applies
this concept against the base of
modified total direct costs of federally-
sponsored research.
Comment Focus the revision on
departmental administration, excluding
non-controversial administrate e
overhead from the fixed rate.
Response: We agree
Comment: Allocated overhead as well
as direct costs should be reviewed
during scientific peer review of funding
applications.
Response: We agree.
Comment: Universities should be
permitted to charge more of allocated
overhead as direct costs.
Response: We agree. Charging more of
existing allocated overhead as direct
costs would subiect these charges to
proper scientific peer review and
improve the allocation and management
of scarce research funds.
Comment: Federal administrative
burdens, such as effort reporting,
application requirements, and funding
controls should be reduced to a
minimum.
Response: We agree. The three
percent fixed allowance for research
administrauon by faculty and
department heads will result ir. the
elimination of Federal requirements for
faculty reporting to document overhead
allocations. OMB encourages the
research community to identify areas
where federally-imposed administrative
burdens could be reduced. In addition.
OMB will conduct a thorough review of
all paperwork requirements associated
with Circular A-21.
Comment: Universities would not
have time to adjust to reduced payments
for allocated overhead.
Response: We agree that the February
12th notice did not clearly indicate that
the fixed rate would be phased-in
gradually b> being applied to only new
grants. We have corrected this, and
believe most universities .ire ajle to
adjust to the revision. Those facing a
severe hardship will, under the current
notice, be able to apply for a waiver.
Comment: Freeze overhead payment
rates at 90 percent of current rates for
one year rather than changing A-21.
Respor.se: An arbitrary reduction
would affect all universities regardless
of their current overhead payment rate,
and would run counter to specific
Congressional guidance. In addition, a
rate freeze would not permit the
elimination of Federal requirements for
faculty reporting to document overhead
allocations.
Comment OMB proposed the revision
without consulting the affected panies.
Resoonse: The February 12th proposal
was published to initiate the
consultation process. We believe that
consultation is best achieved when all
affected parties have a specific proposal
to discuss and analyze, thus permitting
the presentation of alternatives. We
believe in foster.r.3 the university-
government partnership b> opening the
debate on issues to all affected parties.
Since the February 12th proposal, we
have heard from and consulted with
numerous affected parties.
Comment The proposal departs from
the White House Science Council report.
Response: The report, released in
early May. is currently being reviewed
by the Executive Branch. Based on a
preliminary review, we believe that the
report's recommendations regarding
overhead deserve considerable
attention. We believe the 3 percent fixed
allowance is consistent with the report's
recommendations. We note that the
formal requirement for cost sharing has
already been eliminated. Further, we
note that the Department of Health and
Human Services (HHS) intends to adopt
the National Science Foundation's
practices for the award and payment of
overhead allocated by universities to
federally sponsored research. HHS also
intends to institute peer review of
allocated overhead associated with
proposed grant budgets. Together, these
initiatives will respond to a significant
number of the report's
recommenda tions.
Comment: Circular A-21 should be
revised to change the use allowances for
buildings and equipment.
Response: While use allowances arc
beyond the scope of the February 12.
1986 notice, we will consider any
proposals advanced as part of future
discussions on improving the
administration of research. Until a
further revision of Circular A-21.
institutions may find it profitable tu u*>-
the current A-21 provisions which allow
depreciation of facilities.
-------
20910
Federal Register / Vol. 51. No. 110 / Monday, fur.e 9. 19(10 / Notices
Revision of Circular A-Zl
We continue to share Conarpss'
cunr.crn th.it the growth of allocated
overhead threatens the continued
productivity of the Federal/university
research partnership.
Consistent with the reports of the
Ceneral Accounting Office. thejIHS
Inspector Ccneral. and the Office of
Science and Technology Policy, we
believe that Circular A-Z1 should be
revised to reduce the controversy among
scientists, their institutions, and the
various Federal funding and auditing
agencies. In addition, the revision
shouid restore an appropriate bui.ince
between direct Federal research
spending and overr.tnd payments.
Responding to the r.unerous
thoughtful insights of commer.ters. a
fixed 3 percent allowance for the
research administration efforts of
faculty and decartmert heads is
established, effective July I. 1387. The
revision will greatly reduce the current
friction among researchers, universities,
and Federal funding ar.d auditing
agencies. The allowance focuses on the
area of greatest concern, salar.es of
department heads and faculty in
departmental administration, but adopts
the ihrust of numerous suggestions that
the revision recognize the organizational
diversity of educational institutions.
Overhead payments for salaries of
faculty and desartment heads will be
calculated as 3 percent of modified total
direct costs. University indirect cost
rates will be the sum of the rate
negotiated for deoarcr.ental
administration, the negotiated rates for
the remaining six pools, plus the 3
percent fixed allowance.
Faculty reporting will not be required
to support the 3 percent allowance.
Implementation
The revision is effective July 1.1987.
Individual Federal agencies may
implement the revision upon
publication,
jus* 4. '.380.
Circular No. A-Zl. Revised Transmittal
Memorandum No. 2
To the Heads of Executive Departments
and Establishments
SLiB|ECT: Cost Principles for
Educational Institutions
This transmittal memorandum revises
OMB Circular No. A-21. "Cost
Principles for Educational Institutions."
to establish a 3 percent allowance to
cover the administrative work of
department heads and faculty.
Effective on grants and contracts
awarded on or after July 1.1987.
Circular A-21 is revised as follows:
Drpnr'r:er!jl cci.-mns: ~ot:cn
e\ci'nses.
Revise F 4.a.(2!(a|:
(2) Academic departments
(a) Salaries and fnnge benefits
attributable to the administrative work
of department heads, directors of
divisions and organized research units,
faculty and professional staff shall be
allowed at a rate of 3 percent of
modified total direct costs. This
allowance shall be added to (he
computation of the indirect cost rate for
ri.iior function in section C.i the
evoenses covered by the allowance
shall be excluded from the develooment
and allocation of the departmental
ddminatraricn cost pool. No
documentation is required to support
this allowance.
Crnerat AJ~:.nistration end General
Expenses
Add the following sentence to F.3.a.i
Ceneral administration and general
expenses shall not include expenses
incurred within dean's offices, academic
departments, organized research units,
or similar organizational units (see
section F 4.. departmental
administration expenses).
Sponsored Prefects Administration
Revise F 5,a. as follows:
(a) The expenses under this heading
are Ijnited to these incurred by a
separate orsanization(s) established
primarily to admimster.sponsored
projects, including such functions as
grant and contract administration
(Federal and non-Federai) special
security, purchasing. personnel
administration, and editing and
publishing of research and other reports.
They include the salanes and expenses
of the head of sucn organization,
assistants, and immediate staff, together
with the saianes and expenses of
personnel engaged in supporting
activities maintained by the
organization, such as stock rooms,
stenographic pools and the like. This
category also includes an allocable
share of fnnge benefit costs, general
administration and general expenses,
operation and maintenance expenses,
and depreciation/use allowances.
Appropriate adjustments will be made
for services pnovided to other functions
or organizations.
Federal agencies may authorize
reimbursement of additional costs for
department heads and faculty only in
exceptional cases where an institution
can demonstrate undue hardship or
detriment to protect performance.
Fwiiiral a^etuius^ire authorued to
inplrmrnt these ch.inites earlier if thry
chnnse.
lanwl C. MHIer III.
0:--. :. -r.
(FS Out dfr-iraoa R-d	8 43 am|
fiUiMl coot itia-owi
-------
OMB'S REVISION OF CIRCULAR A-21
EXECUTIVE OFFICE OF THE PRESIDENT	EXECUTIVE OFFICE OF THE PRESIDENT
OFFICE OF MANAGEMENT AND BUDGET	OFFICE OF MANAGEMENT AND BUDGET
Washington. D.C. 20503	WASHINGTON, D.C. 20503
OFFICE OF MANAGEMENT AND BUDGET
Revision of OMB Circular A-21. "Cost Principles lor Educa-
tional Institutions"
AGENCY: OFFICE OF MANAGEMENT AND BUDGET
ACTION: Notice of revision to OMB Circular A-21, "Cost
Principles for Educational Institutions"
Summary:
This notice revises the fixed allowance for the administra-
tive efforts of university faculty, department heads, and
selected professional personnel relating to federally-spon-
sored research established in the previous revision to OMB
Circular A-21. published in the June 9. 1986. Federal
Register.
Background:
The June 9th revision to OMB Circular A-21 established a
fixed allowance of 3 percent of modified total direct costs
for the administrative efforts of university faculty, depart-
ment heads, and selected professional personnel relating to
federally-sponsored research. In establishing the rate. OMB
indicated its willingness to consider an adjustment to the
rate if and when additional data became available.
Revision of OMB Circular A-21:
Based on such additional data. OMB Circular A-21 is being
revised to reflect a fixed allowance of IS percent of modi-
fied total direct cost for the administrative efforts of univer-
sity faculty, department heads, and selected professional
personnel relating to federally-sponsored research. No docu-
mentation will be required to support this fixed allowance.
In addition, the language describing the scope of the fixed
allowance is being clarified.
The June 9. 1986. revision to section F.i a. Sponsored
Projects Administration, is not	by this revision.
Implementation:
This revision is effective July 1, 1987. Federal agencies
may elect to implement the 1.S percent fixed allowance
prior to this date. Universities and other institutions affect-
ed by this revision are expected to adjust their
plans accordingly.
CIRCULAR NO. A-21, Revised
Transmittal Memorandum No. 3
TO THE HEADS OF EXECUTIVE DEPARTMENTS AND
ESTABLISHMENTS
SUBJECT: Cost Principles for Educational Institutions
This transmittal memorandum revises OMB Circular No.
A-21. "Cost Principles for Educational Institutions," as re-
vised on June 9, 1986, to update the fixed allowance for the
administrative efforts of faculty, department beads, and
certain professional personnel relating to federally-spon-
sored research, and to clarify the scope of the fixed
allowance.
Effective on grants and contracts awarded on or after
July 1, 1987, Circular A-21 is revised as follows:
Departmental Administration Expenses.
Revise F.-t-aJZXa):
(2) Academic departments
(a) Salaries and fringe benefits attributable to the ad-
ministrative work (Including bid and proposal prepara-
tion) of faculty (including department beads), and other
professional personnel conducting research and/or in-
struction. shall be allowed at a rate of 3.6 percent of
modified total direct costs. This category does not include
professional business or professional administrative offi-
cers. This allowance shall be added to the computation of
the indirect cost rate for major functions in section G; the
expenses covered by the allowance shall be excluded from
the departmental administration cost pooL No documen-
tation is required to support this allowance.
General Administration and General Expend
Replace the Last sentence in F.Xa. (as revised on June 9,
1986), with the following:
General administration and general eiprmn shall not
include expenses incurred within oao-univentty-wide
deans' offices, academic departments, organized research
units, or	organizational units. (See section F.A..
departmental administration expenses.)
federal agencies may authorize reimbursement of addi-
tional costs for department heads and faculty only in excep-
tional cases wbere an institution can demonstrate undue
hardship or detriment to project performance.
Federal agencies are authorized to implement these
changes earlier if they choose.
James C. Miller HI
Director
-------
9
-------

EXECUTIVE OFFICE OF THE PRESIDENT
OFFICE OF MANAGEMENT AND BUDGET
WASHINGTON. D.C. 20503
June 27, 1980	CIRCULAR NO. A-122
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
(No. A-122)
-------
2
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
(1) 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) State, 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 approval" 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 organizations is contained in Attachment C.
Other organizations may be added from time to time.
6.	Responsibilities.	Agencies	responsible	for
administering programs that involve awards to nonprofit
organizations shall implement the provisions of this
Circular. Upon request, implementing instructions 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
(No. A-122)
-------
3
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 B -- 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.
Q
Jemes T. Mclntyre, Jr.' /
Director
Attachments
(No. A-122)
-------
Circular No. A.-122
ATTACHMENT A
GENERAL PRINCIPLES
Table of Contents
Page
A.	BASIC CONSIDERATIONS
1.	Composition of total cost		1
2.	Factors affecting allowability of costs....	1
3.	Reasonable costs		1
4.	Allocable costs		2
5.	Applicable credits		3
6.	Advance understandings		3
B.	DIRECT COSTS		3
C.	INDIRECT COSTS		5
D.	ALLOCATION OF INDIRECT COSTS AND DETERMINATION OF
INDIRECT COST RATES
1.	General		5
2.	Simplified allocation method		6
3.	Multiple allocation base method		7
4.	Direct allocation method		8
5.	Special indirect cost rates		9
E.	NEGOTIATION AND APPROVAL OF INDIRECT COST RATES
1.	Definitions				10
2.	Negotiation and approval of rates		11
-------
Circular No. A-122
ATTACHMENT A
GENERAL PRINCIPLES
A. BASIC CONSIDERATIONS.
1.	Composition of total cost. The total cost of an
award is the sum of the allowable direct and allocable
indirect costs less any applicable credits.
2.	Factors affecting allowability of costs. 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 a prudent person under the circumstances
prevailing at the time the decision was made to incur the
cost. The question of the reasonableness of specific costs
must be scrutinized with particular care in connection with
organizations or separate divisions thereof which receive
the preponderance of their support from awards made by
(No. A-122)
-------
2
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 award.
b.	The restraints or requirements imposed by such
factors as generally accepted sound business practices, arms
length bargaining, Federal and State laws 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 allocable to a particular cost
objective, such as a grant, project, service, or other
activity, in accordance with the relative benefits received.
A cost is allocable to a Government award if it is treated
consistently with other costs incurred for the same purpose
in like circumstances and if it:
(1)	Is incurred specifically for the award.
(2)	Benefits both the award and other work and
can be distributed in reasonable proportion to the benefits
received.
(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 under these principles may not be
shifted to other Federal awards to overcome funding
deficiencies, or to avoid restrictions imposed by law or by
the terms of the award.
(No. A-122)
-------
3
5.	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
adjustments of overpayments or erroneous charges. To the
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 received 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
services have been financed directly, in whole or in part,
by Federal funds.
(c) For rules covering program income (i.e.,, gross
income earned 'from federally supported activities) see
Attachment D of OMB Circular A-110.
6.	Advance understandings. Under any given award the
reasonableness and allocability 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 nonallocability, 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 allocability of that
element.
B. DIRECT COSTS.
1. Direct costs are those that can be identified
specifically with a particular final cost objective; i.e., a
(No. A-122)
-------
4
particular award, project, service, or other direct activity
of an organization. However, a cost may not be assigned to
an award as a direct cost if any other cost incurred for the
same purpose, in like circumstances, has been allocated to
an award as an indirect cost. Costs identified specifically
with awards are direct costs of the awards and are to be
assigned directly thereto. Costs identified specifically
with other final cost objectives of the organization are
direct costs of those cost objectives and are not 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 reasons of practicality where the
accounting treatment for such cost is consistently applied
to all final cost objectives.
3.	The costs of certain activities are not allowable as
charges to Federal awards (see, for example, fund raising
costs in paragraph 21 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 costs 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 rolls, 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.
(No. A-122)
-------
5
e.	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 COSTS.
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 costs 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 costs are those
remaining to be allocated to benefiting cost objectives. A
cost may not be allocated to an award as an indirect cost 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 costs in all situations. However,
typical examples of indirect costs 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 same 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.
(No. A-122)
-------
6
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 costs 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 it
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 2 through 5 below.
e.	The base period for the allocation of indirect
costs is the period in which such costs are incurred and
accumulated for allocation to work performed in that period.
The base period normally should coincide with the
organization'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 (ii) 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
(No. A-122)
-------
7
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 D.5 below, the indirect cost rate
developed under the above principles is applicable to all
awards 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,
taking 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
(No. A-122)
-------
8
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 feet 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) is
required in accordance with paragraph D.5. below, the
separate groupings of indirect costs allocated to each major
function shall be aggregated and treated as a common pool
for that function. The costs in the 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 rate should be
developed for each separate indirect cost pool developed.
The rate in each case should be stated 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 projects performed
under Federal awards). Joint costs, such as depreciation,
rental costs, operation and maintenance of facilities,
(No. A-122)
-------
9
telephone expenses, and the like are prorated individually
as direct cost to each category and to each award, or other
activity using a base most 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 all other respects, the organization's indirect cost
rates shall be computed in the same manner as that described
in paragraph D.2 above.
5. Special indirect cost rates. In some instances, a
single indirect cost rate for all activities of an
organization 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
indirect costs, provisions should be made for a separate
indirect cost pool applicable to such work. The separate
indirect cost pool should be developed during the course of
the regular allocation process, and the separate indirect
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 D.2, 3, and 4
above, and (ii) the volume of work to which the rate would
apply is material.
(No. A-122)
-------
10
E. NEGOTIATION AND APPROVAL OF INDIRECT COST RATES.
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 all Federal
agencies.
b.	"Predetermined rate" means an indirect 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 indirect 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 rate" means an indirect cost rate
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 rate applicable to a specified
period which is used for funding, interim reimbursement, and
reporting indirect costs on awards pending the establishment
of a rate for the period.
f.	"Indirect cost proposal" means the
documentation prepared by an organization to substantiate
its claim for the reimbursement of indirect 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 cost data are desired and for which provision
is made to accumulate and measure the cost of processes,
projects, jobs and capitalized projects.
(No. A-122)
-------
11
2. Negotiation and approval of rates.
a.	Unless different arrangements are agreed to by
the agencies concerned, the Federal agency with the largest
dollar value of awards with an organization will be
designated as the cognizant agency for the negotiation and
approval of indirect cost rates and, where 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 indirect cost rates in accordance with paragraph D.5
above, it will, prior to the time the rates are negotiated,
notify the cognizant agency.
b.	A nonprofit organization which has not
previously established an indirect cost rate with a Federal
agency shallfter the organization is advised that an
award will be made and, in no event, later than three months
after the effective date of the award.
c.	Organizations that have previously established
indirect cost rates must submit a new indirect cost proposal
to the cognizant agency within six months after the close of
each fiscal year.
d.	A predetermined rate may be negotiated for use
on awards where there is reasonable assurance, based on past
experience and reliable projection of the organization's
costs, 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 are 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
(No. A-122)
-------
12
carry-forward adjustment; or (iii) the organization's
operations fluctuate significantly from year to year.
f.	Provisional and final rates shall be negotiated
where neither predetermined nor fixed rates are 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 procedures 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 will lend assistance as required to resolve such
problems in a timely manner.
(No. A-122)
-------
Circular No. A-122
ATTACHMENT B
SELECTED ITEMS OF COST
Table of Contents
Page
1.	Advertising costs		1
2.	Bad debts		1
3.	Bid and proposal costs (reserved)....	1
4.	Bonding costs		1
5.	Communication costs		2
6.	Compensation for personal services...	2
7.	Contingency provisions		7
8.	Contributions		7
9.	Depreciation and use allowances		7
10.	Donations		9
11.	Employee morale, health and welfare
costs and credits		11
12.	Entertainment costs		11
13.	Equipment and other capital
expenditures		12
-------
2
Page
14.	Fines and penalties		13
15.	Fringe benefits		13
16.	Idle facilities and idle capacity....	13
17.	Independent research and development
(reserved)		14
18.	Insurance and idemnification		15
19.	Interest, fund raising, and investment
management costs		16
20.	Labor relations costs		16
21.	Losses on other awards		17
22.	Maintenance and repair costs		17
23.	Materials and supplies		17
24.	Meetings, conferences,		17
25.	Memberships, subscriptions, and
professional activity costs		18
26.	Organization costs		18
27.	Overtime, extra-pay shift, and
multishift premiums		18
28.	Page charges in professional
journals		19
29.	Participant support costs		19
30.	Patent costs		19
-------
3
Page
31.	Pension plans		20
32.	Plant security costs		20
33.	Preaward costs		20
34.	Professional service costs		20
35.	Profits and losses on disposition of
depreciable property or other
capital assets		21
36.	Public information service costs		22
37.	Publication and printing costs		23
38.	Rearrangement and alteration costs...	23
39.	Reconversion costs		23
40.	Recruiting costs		23
41.	Relocation costs		24
42.	Rental costs		25
43.	Royalties and other costs for use of
patents and copyrights		27
44.	Severance pay		27
45.	Specialized service facilities		28
46.	Taxes		29
47.	Termination costs		29
48.	Training and education costs		31
-------
4
Pa^e
49.	Transportation costs	 33
50.	Travel costs	 33
-------
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 40; (ii) the procurement of goods
and services; (iii) the disposal of surplus materials
acquired in the performance of the award except when
organizations are reimbursed for disposals at a
predetermined amount in accordance with Attachment N of 0MB
Circular A-110; or (iv) specific requirements of the award.
2.	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 costs. (reserved)
4.	Bonding costs.
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,
(No. A-122)
-------
2
performance, payment, advance payment, infringement, and
fidelity bonds.
b.	Costs of bonding required pursuant to the terms
of the award are allowable.
c.	Costs 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.	Communication costs. Costs incurred for telephone
services, local and long distance telephone calls,
telegrams, radiograms, postage and the like, are allowable.
6.	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
allowances, hardship pay, and cost of living differentials.
b.	Allowability. Except as otherwise specifically
provided in this paragraph the costs of such compensation
are 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 costs are determined and supported as
required in this paragraph.
c. Reasonableness.
(1) When the organization is predominantly
engaged in activities other than those sponsored by the
Government,	compensation	for	employees	on
Government-sponsored work will be considered reasonable to
(No. A-122)
-------
3
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 will 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 and possible limitations in determining costs
under Federal awards where 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 costs. 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.
f.	Fringe benefits.
(1) 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
(No. A-122)
-------
4
costs are 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
workmen's 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 the provision is made
shall not exceed the present value of the liability.
(b) Where an organization follows a
consistent policy of expensing actual payments to, or on
behalf of, employees or former employees for unemployment
compensation or workmen's compensation, such payments are
allowable in the year of payment with the prior approval of
the awarding agency provided they are allocated to all
activities of the organization.
(4)	Costs of insurance on the lives of
trustees, officers, or other employees holding positions of
similar responsiblity are 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. Pension plan costs.
(1) Costs of the organization's pension plan
which are incurred in accordance with the established
policies of the organization are allowable, provided:
(No. A-122)
-------
5
(a)	Such policies meet the test of
reasonableness;
(b)	The methods of cost allocation are
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. 8 issued by the American Institute of
Certified Public Accountants; and
(d)	- The costs assigned to a given fiscal
year are funded for all plan participants within six months
after the end of that year. However, increases to normal
and past service pension costs caused by a delay in funding
the actuc. lal liability beyond 30 days after each quarter of
the year to which such costs are assignable are unallowable.
(2)	Pension plan termination insurance
premiums paid pursuant to the Employee Retirement Income
Security Act of 1974 (Public Law 93-406) are allowable.
Late payment charges on such premiums are unallowable.
(3)	Excise taxes on accumulated funding
deficiencies and other penalties imposed under the Employee
Retirement Income Security Act are unallowable.
h.	Incentive compensation. Incentive compensation
to employees based on cost reduction, or efficient
performance, suggestion awards, safety awards, etc., are
allowable to the extent that the overall compensation is
determined to be reasonable and such costs are paid or
accrued pursuant to an agreement entered into in good faith
between the organization and the employees before the
services were rendered, or pursuant to an established plan
followed by the organization so consistently as to imply, in
effect, an agreement to make such payment.
i.	Overtime, extra pay shift, and multishift
premiums. See paragraph 27.
j. Severance pay. See paragraph 44.
k. Training and education costs. See paragraph 48.
1. Support of salaries and wages.
(No. A-122)
-------
6
(1)	Charges to awards for salaries and wages,
whether treated as direct costs or indirect costs, will be
based on documented payrolls approved by a responsible
official(s) 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 cognizant agency. (See paragraph E.2. of
Attachment A)
(2)	Reports reflecting the distribution of
activity of each employee must be maintained for all staff
members (professionals and nonprofessionals) whose
compensation is charged, in whole or in part, directly to
awards. In addition, in order to support the 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 rate(s) (e.g., an
employee engaged part-time in indirect cost activities and
part-time in a direct function). Reports maintained by
nonprofit organizations to satisfy these requirements must
meet the following standards:
{*) 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 are performed) do not qualify as support
for charges to awards.
(b)	Each report must account for the
total activity for which employees are 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 must be prepared at least
monthly and must coincide with one or more pay periods.
(No. A-122)
-------
7
(3)	Charges for the salaries and wages of
nonprofessional employees, in addition to the supporting
documentation described in subparagraphs (1} and (2) above,
must also be supported by records indicating the total
number of hours worked each day maintained in conformance
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 as "nonexempt employee," under the Fair Labor
Standards Act.
(4)	Salaries and wages of employees used in
meeting cost sharing or matching requirements on awards must
be supported in the same manner as salaries and wages
claimed for reimbursement from awarding agencies.
7.	Contingency provisions. Contributions to a
contingency reserve or any similar provision made for events
the occurrence of which cannot be foretold with certainty as
to time, intensity, or with an assurance of their happening,
are unallowable. The term "contingency reserve" excludes
self-insurance reserves (see paragraph 6.f.(3) and
18. fl.(2)(d));pension funds (see paragraph 6.(g)); and
reserves for normal severance pay (see paragraph 44.(b)(1).
8.	Contributions. Contributions and donations by the
organize!ion to others are unallowable.
9.	Depreciation and use allowances.
a.	Compensation for the use of buildings, other
capital improvements, and equipment on hand may be made
through use allowances or depreciation. However, except as
provided in paragraph f. below a combination of the 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 fair
market value at the time of the donation.
c.	The computation of use allowances or
depreciation will exclude:
(No. A-122)
-------
8
(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 requirement.
d.	Where the use allowance method is followed, the
use allowance for buildings and improvement (including land
improvements such as paved parking areas, fences, and
sidewalks) will be computed at an annual rate not exceeding
two per cent of acquisition cost. The use allowance for
equipment will be computed at an annual rate not exceeding
six and two-thirds per cent of acquisition cost. When the
use 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 per cent 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 as 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 per cent equipment use allowance
limitation.
e.	Where the 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 as type of construction, nature of the
equipment used, technological developments in the particular
program area, and the renewal and replacement policies
followed for 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
(No. A-122)
-------
9
indicating that the expected consumption of the asset will
be significantly greater or lesser in the early portions of
its useful life than in the later portions, the straight-
line method shall be presumed to be the appropriate method.
Depreciation methods once used shall not be changed unless
approved in advance by the cognizant Federal agency. When
the depreciation method is introduced for application to
assets previously subject to a use allowance, the
combination of use allowances and depreciation applicable to
such assets must not exceed the total acquisition cost of
the assets. When the depreciation method is used for
buildings, a building's shell may be segregated from each
building component (e.g., plumbing system, heating, and air
conditioning system, etc.) and each item depreciated over
its estimated useful life; or the entire building (i.e., the
shell and all components) may be treated as a single asset
and depreciated over a single useful life.
f.	When the depreciation method is used for a
particular class of assets, no depreciation may be allowed
on any such assets that, under paragraph e. above, would be
viewed as fully depreciated. However, a reasonable use
allowance may be negotiated for such assets if warranted
after taking into consideration the amount of depreciation
previously charged to the Government, the estimated useful
life remaining at time of negotiation, the effect of any
increased maintenance charges or decreased efficiency due to
age, and any other factors pertinent to the utilization of
the asset for the purpose contemplated.
g.	Charges for use allowances or depreciation must
be supported by adequate property records and physical
inventories must be taken at least once every two years (a
statistical sampling basis is acceptable) to ensure that
assets exist and are usable and needed. When the
depreciation method is followed, adequate depreciation
records indicating the amount of depreciation taken each
period must also be maintained.
10. Donations.
a. Services received.
(1) Donated or volunteer services may be
furnished to an organization by professional and technical
personnel, consultants, and other skilled and unskilled
(No. A-122)
-------
10
labor- The value of these services is not reimbursable
either as a direct or indirect cost.
(2) The value of donated services utilized in
the performance of a direct cost activity shall be
considered in -the determination of the organization's
indirect cost rate(s) and, accordingly, shall be allocated a
proportionate share of applicable indirect costs when the
following circumstances exist:
(a)	The aggregate value of the services
is material;
(b)	The services are supported by a
significant amount of the indirect costs incurred by the
organization;
(c)	The direct cost activity is not
pursued primarily for the benefit of the Federal Government.
(3)	In those instances where there is no basis
for determining the fair market value of the services
rendered, the recipient and the cognizant agency shall
negotiate an appropriate allocation of indirect cost to the
services.
(4)	Where donated services directly benefit a
project supported by an award, the indirect costs allocated
to the services will be considered as a part of the total
costs of the project. Such indirect costs may be reimbursed
under the award or used to meet cost sharing or matching
requirements.
(5)	The value of donated services may be used
to meet cost sharing or matching requirements under
conditions described in Attachment E, 0MB Circular No.
A-110. Where donated services are treated as indirect
costs, indirect cost rates will separate the value of the
donations so that reimbursement will not be made.
(6)	Fair market value of donated services
shall be computed as follows:
(a) Rates for volunteer services. Rates
for volunteers shall be consistent with those regular rates
paid for similar work in other activities of the
(No. A-122)
-------
11
organization. In cases where the kinds of skills involved
are not found in the other activities of the organization,
the rates used shall be consistent with those paid for
similar work in the labor market in which the organization
competes for such skills.
(b) Services donated by other
organizations. When an employer donates the services of an
employee, these services shall be valued at the employee's
regular rate of pay (exclusive of fringe benefits and
indirect costs) provided the services are in the same skill
for which the employee is normally paid. If the services
are not in the same skill for which the employee is normally
paid, fair market value shall be computed in accordance with
subparagraph (a) above.
b. Goods and space.
(1)	Donated goods; i.e., expendable personal
property/supplies, and donated use of space may be furnished
to an organization. The value of the goods and space is not
reimbursable either as a direct or indirect cost.
(2)	The value of the donations may be used to
meet cost sharing or matching share requirements under the
conditions described in Attachment £, OMB Circular No.
A-110. The value of the donations shall be determined in
accordance with Attachment E. Where donations are treated
as indirect costs, indirect cost rates will separate the
value of the donations so that reimbursement will not be
made.
11.	Employee morale, health, and welfare costs and
credits. The costs of house publications, health or first-
aid clinics, and/or infirmaries, recreational activities,
employees' counseling services, and other expenses incurred
in accordance with the organization's established practice
or custom for the improvement of working conditions,
employer-employee relations, employee morale, and employee
performance are allowable. Such costs will be equitably
apportioned to all activities of the organization. Income
generated from any of these activities will be credited to
the cost thereof unless such income has been irrevocably set
over to employee welfare organizations.
12.	Entertainment costs. Costs of amusement, diversion,
social activities, ceremonials, and costs relating thereto,
(No. A-122)
-------
12
such as meals, lodging, rentals, transportation, and
gratuities are unallowable (but see paragraphs 11 and 25).
13. Equipment and other capital expenditures.
a.	As used in this paragraph, the following terms
have the meanings set forth below:
(1)	"Equipment" means an article of
nonexpendable tangible personal property having a useful
life of more than two years and an acquisition cost of $500
or more per unit. An organization may use its own
definition provided that it at least includes all
nonexpendable tangible personal property as defined herein.
(2)	"Acquisition cost" means the net invoice
unit price of an item of equipment, including the cost of
any modifications, attachments, accessories, or auxiliary
apparatus necessary to make it usable for the purpose for
which it is acquired. Ancillary charges, such as taxes,
duty, protective in-transit insurance, freight, and
installation shall be included in or excluded from
acquisition cest in accordance with the organization's
regular written accounting practices.
(3)	"Special purpose equipment" means
equipment which is usable only for research, medical,
scientific, or technical activities. Examples of special
purpose equipment include microscopes, x-ray machines,
surgical instruments, and spectrometers.
(4)	"General purpose equipment" means
equipment which is usable for other than research, medical,
scientific, or technical activities, whether or not special
modifications are needed to make them suitable for a
particular purpose. Examples of general purpose equipment
include office equipment and furnishings, air donditioning
equipment, reproduction and printing equipment, motor
vehicles, and automatic data processing equipment.
b.	(1) Capital expenditures for general purpose
equipment are unallowable as a direct cost except with the
prior approval of the awarding agency.
(2) Capital expenditures for special purpose
equipment are allowable as direct costs provided that items
(No. A-122)
-------
13
with a unit cost of $1000 or more have the prior approval of
the awarding agency.
c.	Capital expenditures for land or buildings are
unallowable as a direct cost except with the prior approval
of the awarding agency.
d.	Capital expenditures for improvements to land,
buildings, or equipment which materially increase their
value or useful life are unallowable as a direct cost except
with the prior approval of the awarding agency.
e.	Equipment and other capital expenditures are
unallowable as indirect costs. However, see paragraph 9 for
allowability of use allowances or depreciation on buildings,
capital improvements, and equipment. Also, see paragraph 42
for allowability of rental costs for land, buildings, and
equipment.
14.	Fines and penalties. Costs of fines and penalties
resulting from violations of, or failure of the organization
to comply with Federal, State, and local laws and
regulations are unallowable except when incurred as a result
of compliance with specific provisions of an award or
instructions in writing from the awarding agency.
15.	Fringe benefits. See paragraph 6. f.
16.	Idle facilities and idle capacity.
a. As used in this paragraph the following terms
have the meanings set forth below:
(1)	"Facilities" means land and buildings or
any portion thereof, equipment individually or collectively,
or any other tangible capital asset, wherever located, and
whether owned or leased by the 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 difference between
that which a facility could achieve under 100 per cent
operating time on a one-shift basis less operating
(No. A-122)
-------
14
interruptions resulting from time lost for 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., property 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 not
have been reasonably foreseen. Under the exception stated
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.b. 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 are 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).
(No. A-122)
-------
15
18. Insurance and indemnification.
a. Insurance includes insurance which the
organization is required to carry, or which is approved,
under the terras 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 6.f. and 6.g.(2)).
(1)	Costs of insurance required or approved,
and maintained, pursuant to the award are allowable.
(2)	Costs of other insurance maintained by the
organization in connection with the general conduct of its
operations are allowable subject to the following
limitations.
(a)	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)	Costs 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 are allowable to the extent that
types of coverage, extent of coverage, rates, and premiums
would have been allowed had insurance been purchased to
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.
(e)	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 is identified as the beneficiary is
unallowable.
(No. A-122)
-------
16
(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)	Costs incurred because of losses not
covered under nominal deductible insurance coverage provided
in keeping with sound business practice are allowable.
(b)	Minor losses not covered by
insurance, such as spoilage, breakage, and disappearance of
supplies, which occur in the ordinary course of operations,
are allowable.
b. Indemnification includes securing the
organization against liabilities to third persons and any
other loss 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, fund raising, and investment management
costs.
a.	Costs incurred for interest on borrowed capital
or temporary use of endowment funds, however represented,
are unallowable.
b.	Costs of organized fund raising, including
financial campaigns, endowment drives, solicitation of gifts
and bequests, and similar expenses incurred solely to raise
capital or obtain contributions are unallowable.
c.	Costs of investment counsel and staff and
similar expenses incurred solely to enhance income from
investments are unallowable.
d.	Fund raising and investment activities shall be
allocated an appropriate share of indirect costs under the
conditions described in paragraph B. of Attachment A.
20.	Labor relations costs. Costs incurred in
maintaining satisfactory relations between the organization
and its employees, including costs of labor management
committees, employee publications, and other related
activities are allowable.
(No. A-122)
-------
17
21.	Losses on other awards. Any excess of costs over
income on any award is unallowable as a cost of any other
award. This includes, but is not limited to, the
organization's contributed portion by reason of cost sharing
agreements or any underrecoveries through negotiation of
lump sums for, or ceilings on, indirect costs.
22.	Maintenance and repair costs. 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 buildings and equipment or appreciably prolong
their intended life shall be treated as capital expenditures
(see paragraph 13).
23.	Materials and supplies. The costs of materials and
supplies necessary to carry out an award are allowable.
Such costs should be charged at their actual prices after
deducting all cash discounts, trade discounts, rebates, and
allowances received by the organization. Withdrawals from
general stores 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 cost. Materials and supplies charged as 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 vendors.
24.	Meetings, conferences.
a.	Costs associated with the conduct of meetings,
and conferences, and include the cost of renting facilities,
meals, speakers' fees, and the like. But see paragraph 12,
Entertainment costs, and paragraph .29, 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 B. of Attachment A.) These
costs are allowable provided that they meet the general
tests of allowable, shown in Attachment A to this Circular.
(No. A-122)
-------
18
c. Costs of meetings and conferences 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.	Costs of the organization's subscriptions to
civic, business, professional, and technical periodicals are
allowable.
c. Costs of attendance at meetings and
conferences, sponsored by others when the primary purpose is
the dissemination of technical information, are allowable.
This includes costs of meals, transportation, and other
items incidental to such attendance.
26.	Organization costs. Expenditures, such as
incorporation fees, brokers' fees, fees to promoters,
organizers or management consultants, attorneys,
accountants, or investment 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 shift, and multishift premiums.
Premiums for overtime, extra-pay shifts, and multishift work
are allowable only with the prior approval of the awarding
agency except:
a.	When necessary 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 other similar operations which are continuous
(No. A-122)
-------
19
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 authors.
29.	Participant support costs. Participant support
costs are direct costs 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 projects. These costs are 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 extent necessary to make such disclosures,
(ii) preparing documents and any other patent costs in
connection with the filing and prosecution of a United
States patent application where title or royalty-free
license is required by the Government to be conveyed to the
Government, and (iii) general counseling services relating
to patent and copyright matters, such as advice on patent
and copyright laws, regulations, clauses, and employee
agreements are allowable (but see paragraph 34).
b.	Costs of preparing disclosures, reports, and
other documents and of searching the art to the extent
necessary to make disclosures, if not required by the award,
are unallowable. Costs in connection with (i) filing and
prosecuting any foreign patent application, or (ii) any
United States patent application, where the award does not
require conveying title or a royalty-free license to the
Government, are unallowable (also see paragraph 43).
(No. A-122)
-------
20
31.	Pension, plans. See paragraph 6. g.
32.	Plant security costs. Necessary expenses incurred
to comply with Government security requirements or for'
facilities protection, including wages, uniforms, and
equipment of personnel are allowable.
33.	Preaward costs. Preaward costs are those incurred
prior to the effective date of the award directly pursuant
to the negotiation and in anticipation of the award where
such cost is necessary to comply with the proposed delivery
schedule or period of performance. Such costs are 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 are members of a particular
profession or possess a special skill, and who are not
officers or employees of the organization, are allowable,
subject to b, c, and d, of this paragraph when reasonable in
relation to the services rendered and when not contingent
upon recovery of the costs from the Government.
b.	In determining the allowability of costs in a
particular case, no single factor or any special combination
of factors is necessarily determinative. However, the
following factors are 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's capability in the
particular area.
(3)	The past pattern of such costs,
particularly in the years prior to Government awards.
(4)	The impact of Government awards on the
organization's business (i.e., what new problems have
arisen).
(5)	Whether the proportion of Government work
to the organization's total business is such as to influence
(No. A-122)
-------
21
the organization in favor of incurring the cost,
particularly where the services rendered are not of a
continuing nature and have little relationship to work under
Government grants and contracts.
(6)	Whether the service can be performed more
economically by direct employment rather than contracting.
(7)	The qualifications of the individual or
concern rendering the service and the customary fees
charged, especially on non-Government awards.
(8)	Adequacy of the contractual agreement for
the service (e.g., description of the service, estimate of
time required, rate of compensation, and termination
provisions).
c.	In addition to the factors in paragraph b
above, retainer fees 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 suits, and the prosecution of claims
against the Government, are unallowable. Costs of legal,
accounting and consulting services, and related costs,
incurred in connection with patent infringement litigation,
organization and reorganization, are unallowable unless
otherwise provided for in the award (but see paragraph 47e).
35. Profits and losses on disposition of depreciable
property or other capital assets.
a. (1) Gains and losses on the 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 was included. The amount of the
gain or loss to be included as a credit or charge to the
appropriate cost grouping(s) shall be the difference between
the amount realized on the property and the undepreciated
basis of the property.
(2) Gains and losses on the disposition of
depreciable property shall not be recognized as a separate
credit or charge under the following conditions:
(No. A-122)
-------
22
(a)	The gain or loss is processed through
a depreciation reserve account and is reflected in the
depreciation allowable under paragraph 9.
(b)	The property is given in exchange as
part of the purchase price of a similar item and the gain or
loss is 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 as otherwise provided
in paragraph 18.a.(3).
(d)	Compensation for the use of the
property was provided through use allowances in lieu of
depreciation in accordance with paragraph 9.
(3). 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 from the
sale or exchange of property other than the property covered
in paragraph a. above shall be excluded in computing award
costs.
36. Public information service costs.
a. Public information service costs include the
cost associated with pamphlets, news releases, and other
forms-of information services. Such costs are normally
incurred to:
(1)	Inform or instruct individuals, groups, or
the general public.
(2)	Interest individuals or groups in
participating in a service program of the organization.
(3) Disseminate the results of sponsored and
nonsponsored activities.
b. Public information service costs are allowable
as direct costs with the prior approval of the awarding
agency. Such costs are unallowable as indirect costs.
(No. A-122)
-------
23
37.	Publication and printing costs.
a.	Publication costs include the costs of printing
(including 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 are not identifiable with a
particular cost objective, they should be allocated as
indirect costs to all. benefiting activities of the
organization.
c.	Publication and printing costs are unallowable
as direct costs except with the prior . approval of the
awarding agency.
d.	The cost of page charges in journals is
addressed in paragraph 28.
38.	Rearrangement and alteration costs. Costs incurred
for ordinary or normal rearrangement and alteration of
facilities are allowable. Special arrangement and
alteration costs incurred specifically for the project are
allowable with the prior approval of the awarding agency.
39.	Reconversion costs. Costs incurred in the
restoration 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, are 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 (see paragraph
41c). Where the organization uses employment agencies,
costs not in excess of standard commercial rates for such
services are allowable.
(No. A-122)
-------
24
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 limitations
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 are limited to the following:
(1)	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)	Closing 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 fixing up expenses),
utilities, taxes, and property insurance.
(5)	Other necessary and reasonable expenses
normally incident to relocation, such as the costs of
cancelling an unexpired lease, disconnecting and
(No. A-122)
-------
25
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 as 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 an
overseas location shall be considered travel costs 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 costs do
not include costs of transporting household goods.
d.	The following costs related to relocation are
unallowable:
(1)	Fees 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 an employee related
to reimbursed relocation costs.
42. Rental costs.
a.	Subject to the limitations described in
paragraphs b. through d. of this paragraph, rental costs are
allowable	to the extent that the rates are reasonable in
light of	such factors as: rental costs of comparable
property,	if any; market conditions in the area;
alternatives available; and the type, life expectancy,
condition,	and value of the property leased.
b.	Rental costs under sale and leaseback
arrangements are allowable only up to the amount that would
be allowed had the organization continued to own the
property.
(No. A-122)
-------
26
c.	Rental costs under less-than-arms-length 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 less-than-arms-length lease is one under"
which one party to the lease agreement is able to control or
substantially influence the actions of the other. Such
leases include, but are not limited to those between (i)
divisions of an organization; (ii) organizations under
common control through common officers, directors, or
members; and (iii) an organization and a director, trustee,
officer, or key employee of the organization or his
immediate family either directly or through corporations,
trusts, or similar arrangements in which they hold a
controlling interest.
d.	Rental costs under leases which create a
material equity in the leased property are allowable only up
to" the amount that would be allowed had the organization
purchased the property on 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 exists if the lease is 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 is 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
periods 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 is expected to be
economically usable by one or more users.
(No. A-122)
-------
27
43.	Royalties and other costs for use of patents and
copyrights.
a.	Royalties on a patent or copyright or
amortization of the cost of acquiring by purchase a
copyright, patent, or rights 'thereto, necessary for the
proper performance of the award are allowable unless:
(1)	The Government has a license or the right
to free use of the patent or copyright.
(2)	The patent or copyright has 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 is expired.
b.	Special care should be exercised in determining
reasonableness where the royalties may have been arrived at
as a result of less then arm's length bargaining; e.g.:
(1)	Royalties paid to persons, including
corporations, affiliated with the organization.
(2)	Royalties paid to unaffiliated parties,
including corporations, under an agreement entered into in
contemplation that a Government award would be made.
(3)	Royalties paid under an agreement entered
into after an award is 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 as
dismissal wages, is a payment in addition to regular
salaries and wages, by organizations to workers whose
employment is being terminated. Costs of severance pay are
allowable only to the extent that in each case, it is
required by (i) law, (ii) employer-employee agreement, (iii)
(No. A-122)
-------
28
established policy that constitutes, in effect, an implied
agreement on the organization's part, or (iv) circumstances
of the particular employment.
b. Costs of severance payments are divided into
two categories as follows:
(1)	Actual normal turnover severance payments
shall be allocated to all activities; or, • where the
organization provides for a reserve for normal severances
such method will be acceptable if the charge to current
operations is 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 mass severance pay is of such
a conjectural nature that measurement of costs by means of
an accrual will not achieve equity to both parties. Thus,
accruals for this purpose are not allowable. However, the
Government recognizes its obligation to participate to the
extent of its fair share, in any specific payment. Thus,
allowability will be considered on a case-by-case basis in
the event of occurrence.
45. Specialized service facilities.
a.	The costs of services provided by highly
complex or specialized facilities operated by the
organization, such as electronic computers and wind tunnels,
are allowable provided the charges for the services meet the
conditions of either b. or c. of this paragraph and, in
addition, take into account any items of income or Federal
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 to
(No. A-122)
-------
29
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 principles 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 organization1s other work shall not be
allowable unless the organization submits evidence that it
would not retain such items at cost 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 are 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
(No. A-122)
-------
30
hand, in transit, and on order are in excess of the
reasonable quantitative requirements of other work.
b.	Costs 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 shall
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:
(1)	Such special tooling, machinery, or
equipment is not reasonably capable of use in the other work
of the organization.
(2)	The interest of the . Government is
protected by transfer of title 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 makes all reasonable efforts to
terminate, assign, settle, or otherwise reduce the cost of
such 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:
(No. A-122)
-------
31
(a)	The preparation and presentation to
awarding agency of settlement claims and supporting data
with respect to the terminated portion of the award, unless
the termination is for default. (See paragraph 4.a. of
Attachment L, OMB Circular No. A-110; 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 grantees are reimbursed for disposals at
a predetermined amount in accordance with Attachment N of
OMB Circular A-110.
(3)	Indirect costs related to salaries and
wages incurred as settlement expenses in subparagraphs (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 claims which
are common to the award, and to other work of the
organization are generally allowable. An appropriate share
of the organization's indirect expense may be allocated to
the amount of settlements with subcontractor/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 costs.
a. Costs of preparation and maintenance of a
program of instruction including but not limited to on-the-
job, classroom, and apprenticeship training, designed to
increase the vocational effectiveness of employees,
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 the training
is in an institution not operated by the organization, are
allowable.
(No. A-122)
-------
32
b. Costs of part-time education, at an
undergraduate or postgraduate college level, including that
provided at the organization's own facilities, are allowable
only when the course or degree pursued is relative to the
field in which the employee is now working or may reasonably
be expected to work, and are limited to:
(1)	Training materials.
(2)	Textbooks.
(3)	Fees charged by the
educational
institution.
institution,
(4) Tuition charged by the educational
or in lieu of tuition, instructors' salaries
and the related share of indirect costs of the educational
institution to the extent that the sum thereof is not in
excess of the tuition which would have been paid to the
participating educational institution.
(5) Salaries and related costs oi
who are employees of the organization.
instructors
(6) 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 is unallowable.
c. Costs of tuition, fees, training materials, and
textbooks (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, are allowable only when the course or degree
pursued is related to the field in which the employee is now
working or may reasonably be expected to work, and only
where the costs receive the prior approval of the awarding
agency. Such costs are limited to the costs attributable to
a total period not to exceed one school year for each
employee so trained. In unusual cases the period may be
extended.
d. Costs of attendance of up to 16 weeks per
employee per year at specialized programs specifically
(No. A-122)
-------
33
designed to enhance the effectiveness of executives or
managers or to prepare employees for such positions are
allowable. Such costs include enrollment fees, training
materials, textbooks and related charges, employees''
salaries, subsistence, and travel. Costs allowable under
this paragraph do not include those for courses that are
part of a degree-oriented curriculum, which • are allowable
only to the extent set forth in b. and c. above.
e.	Maintenance expense, and normal depreciation or
fair rental, on facilities owned or leased by the
organization for training purposes are allowable to the
extent set forth in paragraphs 9, 22, and 42.
f.	Contributions or donations to educational or
training institutions, 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 organization
must demonstrate that such costs are consistently incurred
pursuant to an established training and education program,
and that 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. These
costs are allowable. When such costs 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.
50.	Travel costs.
a. Travel costs are the expenses for
transportation, lodging, subsistence, and related items
incurred by employees who are in travel status on official
business of the organization. Travel costs are allowable
(No. A-122)
-------
34
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 administration of-the
organization.
b.	Such costs may be charged on an actual basis,
on a per diem or mileage basis in lieu of actual costs
incurred, or on a combination of the two, provided the
method used results in charges consistent with those
normally allowed by the organization in its regular
operations.
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 less 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
movements 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 the United
States and its territories and possessions. However, for an
organization located in foreign countries, the term "foreign
travel" means travel outside that country.
(No. A-122)
-------
Circular No. A-122
ATTACHMENT C
NONPROFIT ORGANIZATIONS NOT SUBJECT TO THIS CIRCULAR
Aerospace Corporation
El Segundo, California
Argonne Universities Association
Chicago, Illinois
Associated Universities, Incorporated
Washington D.C.
Associated Universities for Research and Astronomy
Tuscon, 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 (CEER)
(University of Puerto Rico)
Commonwealth of Puerto Rico
Charles Stark Draper Laboratory, Incorporated
Cambridge, Massachusetts
Comparative Animal Research Laboratory (CARL)
(University of Tennessee)
Oakri dge, Tennes see
Environmental Institute of Michigan
Ann Arbor, Michigan
-------
2
Hanford Environmental Health Foundation
Richland, Washington
IIT Research Institute
Chicago, Illinois
Institute for Defense Analysis
Arlington, Virginia
Institute of Gas Technology
Chicago, Illinois
Midwest Research Institute
Headquarted 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
Oakridge Associated Universities
Oakridge, Tennessee
Project Management Corporation
Oakridge, Tennessee
Rand Corporation
Santa Monica, California
Research Triangle Institute
Research Triangle Park, North Carolina
Riverside Research Institute
New York, New York
-------
3
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
University 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.
-------
APPENDIX B
LOBBYING COSTS - NEW PARAGRAPH IN OMB CIRCULAR A-I22
-------
Friday
April 27, 1984
Part VII
Office of
Management and
Budget	
Circular A-122: Cost Principles for
Nonprofit Organizations; "Lobbying**
Revision
Department of Defense
General Services Administration
National Aeronautics and Space
Administration
48 CFR Part 31
Federal Acquisition Regulation; Final Rule
-------
18260
Federal Register / Vol. 49. No. 83 / Friday, April 27.1984 / Notices
OFFICE OF MANAGEMENT AND
BUDGET
Circular A-122; Cost Principles for
Nonprofit Organization*—"Lobbying"
Revision
aoency; Office of Management and
Budget, Executive Office of the
President
action: Publication of Revision to the
Circular.
summary: This notice sets forth the final
version of the Office of Management
and Budget's (OMB) "Lobbying"
revision to Circular A-122. "Cost
Principles for Nonprofit Organizations."
The revison makes unallowable for '
Federal reimbursement the costs
associated with most kinds of lobbying
and political activities, but does not
restrict lobbying or political activities
paid for with non-Federal funds.
A parallel revision is being made to
the Federal Acquisition Regulation
(FAR) to cover all defense and civilian
contractors. The FAR revision appears
on the pages immediately following the
Circular A-122 revision.
effective DATE: This revision will
become effective May 29.1984. The
revision will affect only grants,
contracts, and other agreements entered
into after the effective date. Existing
grants, contracts, and other agreements
will not be affected. Agency contracts
and regulations will incorporate these
provisions to the same extent and in the
same manner as they do other
provisions of Circular A-122.
FOR FURTHER INFORMATION CONTACT!
John J. Lord an. Financial Management
Branch. Office of Management and
Budget Washington. D.C. 20503. (202)
395-6823.
SUPPLEMENTARY INFORMATION: The
attached text'sets forth the final
language for the revision to Circular A-
122 that was proposed on November 3.
1983. 48 FR 50860-50674. Significant
modifications have been made to the
proposed language after a thorough
review of the approximately 93.000
public comments received and extensive
discussions with the General
Accounting Office and cognizant
Congressional committees.
Table of Contents
L Background of Circular A-122
~. History of the Revision
m. Summary of the Revision
IV.	Significant Changes from November
Proposal
V.	Purpose of the Revision
VL Principal Objections to the Proposal
A.	Legal Authority
B.	First Amendment
C.	Internal Revenue Code
D.	Restricting the Flow of Information
E.	Evidence of Confusion Regarding
Current Lobbying Restrictions
F.	The Proposed Revision Was Not
Sufficiently Restrictive
VQ. Analysis of Comments and Resulting
Changes to Proposal
A.	Unallowable Lobbying—subparagraph a
B.	Electioneering—sections a(l) and a(2)
C Attempts To Influence Legislation—
sections a(3) and a(4)
D. Legislative Liaison—section a(5)
& Exceptions to Unallowable Lobbying-^
subparagraph b
F. Legislative Requests for Technical and
Factual Information—section b(l)
C.	State Level Lobbying Related to
Performance of Grant or Contract-
section b(2)
H. Lobbying Authorized by Statute-
section b(3)
L Exceptions Deleted from November
Proposal
J. Accounting Treatment of Unallowable
Costs—subparagraph c
K. Indirect Cost Rate Proposal—section
c(l)
L Certification Requirement—section c(2).
M. Recordkeeping—sections c(3) and c(4)
N. Administrative Restrictions on
Agencies—section c(5)
O. Paragraph Renumbering Provision
VUL Paperwork Reduction Act
Considerations
DC. Enforcement
X. Designation as a "Non-Major" Rule
L Background of Grrular A-122
Circular A-122. "Cost Principles for
Nonprofit Organizations," establishes
uniform rules for determining the costs
of grants, contracts, and other
agreements. Like other OMB cost
principle circulars for state and local
governments and educational
institutions. Circular A-122 is a
management directive addressed to the
heads of Federal departments and
agencies and constitutes the legal basis
by which they define allowable and
unallowable costs and how such costs
are calculated.
Circular A-122 was first issued in June
1980. It was developed by an
interagency team chosen from the major
grant-making agencies and led by OMB.
Before issuance, public comments were
sought and received, and consultations
were held with the General Accounting
Office. The cost principles built upon
accounting rules previously in use by
Federal agencies in their dealings with
nonprofit organizations. The Circular
standardized and simplified those rules.
In generaL the Circular provides that to
be recovered from the Federal
government costs incurred by grantees
and contractors must be necessary,
reasonable, and related to the federally-
sponsored activity. In addition, costs,
must be legal, proper, and consistent
with the policies that govern the
organization's other expenditures.
The disallowance of lobbying costs in
this revision is comparable to the
disallowance by Circular A-122 of other
costs which are not reimbursed on
grounds of public policy, such as
advertising, fundraising expenses and
entertainment In each of these
instances, a determination has been
made that it would not be appropriate or
cost-efficient to permit Federal tax
dollars to be used for these purposes. In
any event it should be noted that
lobbying costs are currently
unallowable: as indicated throughout,
this revision is intended to clarify and
make more uniform the meaning and
application of that bar.
IL History of the Revision
On January 24.1983. OMB published a
'proposal to revise Circular A-122's
treatment of the costs of lobbying
activities by defining as unallowable the
-costs of advocacy activities performed
by Federal nonprofit grantees and
contractors with appropriated funds. 48
FR 3348-3351. Following publication.
OMB received approximately 48,300
comments from the public, from
nonprofit and commercial organizations
and from government agencies.
Approximately 16.500 comments
opposed the proposed revision, and
approximately 31.800 supported it Many
of the comments opposing the revision
expressed support for the general
principle that Federal tax dollars should
not be used for lobbying and related
purposes, but objected that the
proposals contained in the January 1983
notice would disrupt the legitimate
activities of Federal nonprofit grantees
and contractors. On the other hand,
many of the supporting comments
suggested a need for controls
significantly more restrictive than those
proposed.
In order to permit further study of-the
issues raised by these comments. OMB
withdrew the January 1983 proposal at
the end of the 45-day public comment
period. In the intervening months, OMB
conducted numerous discussions with
nonprofit organizations, business
groups, trade associations, the General
Accounting Office, and interested
Committees of the Congress and their
staffs. After further consideration of the
comments and discussions, QMB
published a second proposal on
November 3.1983. to revise the
Circular's cost standards. The
November proposal represented a
fundamental revision of the original
January proposal as a result of the
-------
Federal Register / VoL 49, No. 63 / Friday, April 27, 1984"/ Notices
18261
lengthy dialogue between OMB and
iffected groups.
The most important changes from the
tanuary proposal were:
•	Adoption of an allocation method of
i ceo anting for the costs of lobbying and
related activities;
•	A more limited definition of
unallowable coats; and
•	Clarifications end limits on
reporting and recordkeeping
requirements in the spirit of the
Paperwork Reduction Act
The November 1983 proposal initially
provided for a 45-day public comment
period. 48 FR 50880-50874. As a result of
the interest shown by the public and
Congress and the large volume of
comments received by OMB, the
comment period was extended for thirty
days until January IB, 1984.48 FR 58463-
56484.
By the end of the public comment
period. OMB had received some 93,000
separate comments. Of these, some
87,500 {93.5%] favored the proposed
revision without further changes; some
4.175 (4.5%) opposed the revision or
•ought further modifications; and some
1.925 (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
members 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 met 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 the 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, OMB 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
I legal authority to issue the Circular
amendment published today, and that
he supports it
IIL 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 the 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 utilizie 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-profit
contractors, in that it does not cover:
•	Lobbying at the local level
(unallowable under both the Federal
Acquisition Regulation (FAR) and the
Defense Acquisition Regulation (DAR)
supplement to die 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 then
.25% of their work time in defined
lobbying activities. Moreover, the clear
standards provided by the revision will
proveof substantial benefit to nonprofit
grantees in audit situations by reducing
the resources necessary to resolve
whether Federal funds were spent on
.unallowable activities.
The penalties far violating the
revision will be the same as for any
other cost principle in OMB Circular A-
122. The standard remedy is recovery of
the misspent money. In cases of serious
abuse, however, the grant or contract
may be suspended or terminated, or the
recipient may be debarred from
receiving further Federal grants or
contracts for a certain period.
IV. Significant Changes From the
November Proposal
After review of the comments
submitted during the comment period.
OMB has made further significant
changes to the revision. Among the most
noteworthy amendments are the
following:
1.	The definitional term "lobbying and
related activities"has been changed to
"lobbying."
Numerous co mm enters expressed
concern that the term "related
activities" could be used in the 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 as
"lobbying."
The original t£ns for the activities
defined as unallowable (in the January
1B83 proposal] was "political advocacy."
That term was changed to "lobbying and
related activities" in the November
proposal and has now been revised to
"lobbying." Deletion of 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 to cover
attempts to influence "the introduction
of legislation" and "the enactment or
-------
18262
Federal Register / VoL 49. No. 83 / Friday. April 27, 1964 /.Notices
modification of * * * pending
legislation." Sections a(3) and a(4).
This change makes more precise the
scope of the activities disallowed, and
conforms to the IRS definition of
lobbying.
3.	The "legislative liaison "provision
has been made less restrictive, and
clarified. Section a(5).
In the November proposal all
legislative liaison was deemed to be
unallowable unless it did not relate to
otherwise unallowable activities.
Commenters complained that this
section was both too confusing, because
it employed a double negative, and too
restrictive. Section a(£) has been revised
to clarify 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," as
defined in the revision.
4.	The exception for providing
,,assistance in response to a "specific
written request"has been broadened to
facilitate easier usage and has been
narrowed in other respects. Section b(l).
The final version has been broadened
by deleting the "specific written
request" requirement and permitting
oral requests, if properly documented:
allowing "cognizant staff members" (in
addition to Congressmen) to make such
requests: and making Congressional
Record notices sufficient to invoke the
exception.
The exception also has been
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 and factual" and further
requiring that the information is "readily
obtainable and can be readily put in
deliverable form." Further, the use of the
term "technical and factual
presentation" avoids use of the
exception whenever technical and
factual information is provided in any
manner of lobbying presentation and
likewise avoids the requirement that
brief advocacy conclusions 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
the terms of section a(3) are nonetheless
made allowable if expended for the
purpose of offering Congressional
hearing testimony pursuant to written
request of the Committee's Chairman or
Ranking Minority Member for a
technical and factual presentation.
5. The state waiver clause in the state
lobbying exception has been deleted
and the scope of the exception clarified.
-Section b(2).
The state waiver clause was added to
the November 1983 notice in response to
concerns raised by some nonprofit
organizations. It would have permitted
states to make allowable all state
lobbying by their subgrantees. Upon
further review, however, the clause was
determined to be confusing and
superfluous. Further, under none of
Circular A-122's other 50 cost categories
do states have the right to override
Federal cost standards.
Two significant clarifying changes
have been made in new section b(2).
First the "lobbying" covered by the
exception has been explicitly limited to
lobbying made unallowable by section
a(3); thus, for example, grassroots
lobbying (covered under section a{4))
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
grant, contract, or other agreement, and
efforts to reduce the costs to the
' organization of such performance. The
original language, applying to an
organization's "ability" to perform the
grant contract or other agreement was
deemed too broad.
8. The exception for "activity in
connection with an employee's service
as an elected or appointed official or
member of a governmental advisory
board" was deleted. Section c(3) in
November proposal.
This provision was put in the January
1983 proposal to prevent part-time
government officials from being subject
to complete non-reimbursement as a
result of the "tainting" principle. Since
the allocation method is now used, the
exception is irrelevant and would open
major loopholes.
7.	The "disclosure"requirement
relating to the indirect cost rate
proposal has been clarified and
explicitly tied to existing accounting
guidelines. Section c(l).
The November proposal had required
a statement "identifying by category,
costs attributable in whole or in part to
lobbying" and "stating how they are
accounted for."
Section c(l) now simply requires that
total lobbying costs "be separately
identified" in the indirect cost rate
proposal and treated consistently with
other unallowable activity costs, as
required by the operative Circular A-122
accounting provision.
8.	The Circular A-122 certification'
requirement has been changed to
conform to the Defense and CSA
November 1983 proposal. Section c(2).
The November proposal's certification
requirement pertains to the "Financial °
Status Report" which is prepared on an
individual grant basis. However, most
lobbying activities are accounted for in
an entity's indirect costs, which are
calculated on an organization-wide
basis. Thus, the appropriate place to
certify such costs is in the Indirect Cost
Rate ProposaL-as required under the
Defense and GSA (FAR] approach. The
final version has been changed to reflect
this fact
B. The language explaining the "25%
Rule" exception for recordkeeping has
been clarified. Section c(4).
Some, commenters said that the
annual period the 25% rule covered
created retroactivity problems, in that
intensive late-year lobbying could
remove the rule's paperwork protections
for persons who had previously
estimated that the 25% trigger would not
be exceeded. Other commenters said it
was unclear whether the rule was to be
based on 40-hour weeks or the actual
hours worked. In response, the phrase
"25% of the time" has been revised to
"25% of his compensated hours of
employment during that calendar
month."
V. Purpose of the Revision
As set forth at greater length in the
preambles to the }anuary and November
notices, the purpose of this revision is to
establish comprehensive, government-
wide cost principles to ensure that
nonprofit Federal grantees and
contractors do not use appropriated
funds for lobbying activities. This
principle is achieved by disallowing the
recovery of lobbying costs in a manner
consistent with the treatment under
Circular A-122 of other costs which are
disallowed on grounds of public policy,
lb adopting this revision. OMB does not
intend to discourage or penalize
nonprofit organizations from conducting
lobbying efforts with their own non-
Federal funds. The sole purpose of this
revision is to require that those efforts
be paid for with funds raised from other
sources and to ensure that the Federal
government does not subsidize such
lobbying activities with appropriated
funds. In addition, this revision seeks,
for the sake of auditors and auditees
both, to clarify definitions and thereby
to make the current provisions against
use of funds for lobbying purposes both
easier to comply with and to enforce.
In recent years. Congress and the
Comptroller General have recognized
that the use of Federal monies by
grantees and contractors to engage in
-------
Federal Register / Vol. 49. No. B3 / Friday. April 27. 1984 / Notices
10263
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 from 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 and
grantees. This improperly distorts the
political process, by favoring the
political expression of some—
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
political 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,
nonpartisan administration of Federally-
funded programs. The revision seeks to
avoid the appearance that, by awarding
Federal grants, contracts, or other
agreements to organizations engaged in
political advocacy on particular aides of
public issues, the government has
endorsed, fostered, or "prescribefd] [as]
orthodox" a particular view on such
issues. West Virginia Slate Board of
Education v. Barnette, 318 U.S. 624. 645
(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 that the First
Amendment rights are somehow not
fally realized unless they are subsidized
by the State."* Regan v. Taxation with
Representation of Washington. 103 S.CL
1937, 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 the
past ten years, some 40-50 riders hove
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 Labor-HHS-Education-Related
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 Art shall be used to pay the salary or
expenses of any grant or contract recipient or
agency acting for such recipient to engage in
any activity designed to influence legislation
or appropriations frmHhig before the
Congress. (Section 509. Pub. L. 98-139.)
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, clear
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 clear definitions or standards for
determining which activities by grantees
and contractors violate the lobbying
restriction*.
Furthermore, when audits are
undertaken, the lack of clear 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 included 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 claims that
may be raised. In light of the enormous
expansion of Inspector General staffs
and the sensitivity 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 Subcommittee of
the House Armed Services Committee
recently concluded:
(Inhere is a deficiency in the
appropriation* acts' prohibition of lobbying
with appropriated funds. A review of the
legislative history of the publicity-
propaganda appropriations acts restrictions
provides bo definition of the critical terms
"publicity" and 'propaganda.' Thus, there
appears to be no firm distinction between the
conduct which is permiasible and that which
is prohibited. Thus the dear signal from
Congress through the appropriations laws
and other actions has not been translated
into effective management controls.
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 IB. 1961. the
Department of Defense issued revisions
to its Defense Acquisition Regulation
(DAR), addressing for the first time the-
iasue 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
eliminating certain exceptions from
coverage.
•	On May 20.1982. NASA issued a
new cost principle in the NASA
Procurement Regulation {NASAPR}
making certain lobbying costs
unallowable for NASA contractors.
•	On November 2.1982, the General
Services Administration issued a new
cost principle in the Federal
Procurement Regulation (FPR) making
certain lobbying costs unallowable for
civilian agency contracts with
commercial organizations.
•	On April 1,1984, the three sets of
cost principles that had governed
Federal contracts—the DAR. FPR and
NASAPR—were replaced by the new
Federal Acquisition Regulation (FAR).
The FAR is the product of several years
of inter-agency negotiations to create a
uniform set of guidelines for all Federal
contractors. The procurement agencies
are required to use the new FAR
regulation* except in those, cases where
they issue a formal devia^n to a
specified FAR section. The FAR adopted
-------
18264
Federal Register / Vol 49. No. 83 / Friday. April 27, 1984 / -Notices
the former FPR lobbying cost principle.
The Defense Acquisition Regulation
Council, however, issued a deviation so
that the former DAR lobbying cost
principle continues to 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 apply to
them. Therefore, in keeping with sound
management practices, it is important
that the 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-122 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 were used to finance
lobbying activities or abortion-related
activities:
Clear Federal guidance is needed both to
ensure that Title X program funds are not
used for lobbying and to preclude
unnecessary controversy over whether
grantees are violating Federal restrictions.
The move to revise and make more specific
the cost principles applicable to all Federal
grantees is the appropriate mechanism to
achieve these ends. GAO/HRD-S2-106 (Sept.
24.1982) at 27 (emphasis added).
This revision thus addresses the major
area in which Federal cost principles
have not yet been adopted to ensure
that appropriated funds are not used to
_ subsidize lobbying by Federal grantees
and contractors. This revision is
intended to provide lines of demarcation
•n that nonprofit entities can know in
advance what is allowable. The revision
protects their First Amendment rights
and in significant respects strongly
advances their interests. By giving
nonprofit entities clear 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
nonprofits 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 years-
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. See.
e.g.. King v. Smith. 3S2 U.S. 309 (1968).
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" U.S. Constitution. Article IL
Section 3; his authority under section
205(a) of the Federal Property and
Administrative Services Act 40 U.S.C.
486(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 to OMB by
Executive Order No. 11541 (July 1,1970).
pursuant to Reorganization Plan No. 2 of
1970,5 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. 11893
(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 turn,
incorporate the provisions and
requirements of applicable OMB
Circulars into grant and contract
agreements through regulations, grant or
contract terms, or other means. In this
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 Transit Authority. 441 F. Supp.
Ilea 1172 (NJD. Ga. 1977).
-------
Federal Register / VoL 49. No. 83 / Friday. April 27, 1984 / Notices
18263
This revision, like the coat principles
disallowing advertising, fundraising,
entertainment and investment
management costs, is directly related to
the 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 the appropriate mechanism
to achieve these ends [of ensuring that
program funds are not used for
lobbying]." GAO/HRD-82-108
(September 24,1982), at 27.
As noted, the Comptroller General
believes that OMB has the clear legal
authority to issue the Circular
amendment published today, and
supports it
B. First Amendment Considerations
Some commenters 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£t
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 y. 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 be
made to eliminate amhiguity or provide
clarity, appropriate changes have been
made.
Intent Underlying the Circular. Some
commenters suggested that the revision
was the product of an unconstitutional
discriminatory purpose. anj( 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 concern
is without foundation. As more fully
explained in the November 1983 notice.
the intent behind the revision is
nondiscriminatory, and its effects are
politically neutral. It is 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 entities. Hie 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 5086a
Furthermore, nothing in these neutral
accounting principles provides any basis
for concern that 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. Ct 1997,2002-2003.
Overbreadth. Some commenters
claimed that the revision violates the
First Amendment because its provisions
are 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 the comments. OMB
believes that the "overbreadth" claims
are defective. This is particularly so in
light of the elimination of the so-called
"tainting" theory, under which Federal
reimbursement would have been
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
more narrowly crafted "allocation"
approach, in which only the actual
amounts expended are deemed
unallowable—an amendment that more
than satisfies all overbreadth concerns.
Moreover, this allegation applies with
greater force to the current vague bar in
the Circular and to the statutory bars
earlier noted.
Vagueness. Other commenters
suggested that the proposed revision
was impermissibly 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 these claims' wholly unperauasive.
As noted above, the management
consideration driving this revision is the
desire to provide a clear, uniform
definition of unallowable activities, so
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 possible
ambiguity and provide explicit guidance
to nonprofit entities, the final revision
has been revised in several respects,
and a section-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
subparagraphs 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.
Recordkeeping. Finally, some
commenters suggested that the
revision's reporting and recordkeeping
requirements somehow would burden or
chill the First Amendment rights of
nonprofit entities. These recordkeeping
requirements comply fully, however,
with the Supreme Court's decision in
Regan, see 103 S. Ct at 2000 n.6, and are
consistent with accepted accounting
principles. In fact they constitute one of
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 explicit than those provided by
OMB management circulars in other
circumstances for other types of costs.
See the current Circular A-122. and
Circular A-110: "Uniform
Administrative Requirements" for
nonprofit organizations, and compare
-------
18266
Federal Register / Vol. 49. No. 83 / Friday. April 27, 1984 /.Notices
with section c(4) of the revision. As
noted above, one of OMB's primary
goals has been to reduce the burden on
nonprofit entities during the audit
process and to reduce the amount of
bookkeeping material auditors may
demand in challenging the allowability
of their lobbying costs.
The revision simply requires nonprofit
entities to "maintain adequate records
to demonstrate that the determination of
costs as being allowable or unallowable
pursuant to paragraph BZ1 complies
with the requirements of this Circular."
The paragraph does not call for separate
establishment of the lobbying and non-
lobbying activities of an entity. Indeed,
in the case of indirect-cost employees
who spend 25% or less of their time
engaging in lobbying, there is no
requirement that they maintain time
togs, calendars, or similar records. The^
grantee or contractor, in such instances,
exercises full discretion over its
recordkeeping activities.
In sum. the recordkeeping
requirements are lawful reasonable,
and by no means burdensome relative to
other unallowable cost activities.
C. Relationship With Internal Revenue
Code Provisions
Some commenters suggested that the
Circular A-122 revision was 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 Code has no direct bearing on
preventing the use of grantee hinds 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 provisions
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 does 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
provisions thus do not preempt or
otherwise make unnecessary the
promulgation of cost 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 riders 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 thoBe
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 provision
does not prevent disallowance of the
use of Federal grant monies for the
advancement of private partisan or
financial interests. This point is perhaps
best highlighted by the fact that nothing
in the Code would prevent some
grantees from spending all of their grant
funds for lobbying purposes.
Similarly, the fact that the Coda and
other provisions of law regulate
lobbying activities of business firms
(e.g.. 28 (J.S.C. 162(e); Federal Election
Campaign Act 2 U.S.C. 431-456) does
not mean that there should be no
provisions in the FAR regarding such
activities. Some members of the
business community suggested that any
provisions in Circular A-122 regarding
the unallowability 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 statins
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 nonprofit
entitifes. Where differences remain.
Circular A-122 is generally narrower in
its application than the Code—and 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 as revised would require
all nonprofits to maintain multiple sets
of boota. no commenter 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 (those 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.
D. Restricting the Flow of Information
Many of the aitical nonprofit
commenters asserted that it is crucial
for them to be allowed to "educate"
policymakers on pending legislation,
and that the revision will impede their
testimony and other assistance to
legislators, by restricting the uBe 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 on the
government and on nonprofit
organizations through discouraging
communication with Congress and
diBallowing activities that are vitally
important to nonprofit organizations."
Most such commenters seemed to
premise their comments on the groun'
that the proposal would prevent then
from even attending legislative hearing
or analyzing legislation. Other^c!aimed"
that should Federal funds not be
-------
Eederal Register / Vol. 49. No. 83 / Friday. April 27, 1984 / Notices
18267
available, there would be so other
manner in which Legislators could
receive their valuable information.
OMB has repeatedly stated that the
only effect of the revision is intended to
prevent Federal funds being expended .
for lobbying purposes, and that nothing
in the revision limits the ability of
nonprofit entities to lobby with their
own funds. OMB has made every effort
to clarify the terms of the revision so as
to eliminate such misconceptions about
the scope of what is unallowable.
Hence, various language changes have
1wen made in the revision, especially in
sectioira(5) and b(l). It was never
intended, for example, that funding for
all attendance at legislative hearings
would be proscribed, but only that that
funding for attendance connected with
or in knowing preparation for a lobbying
effort would be precluded. The final
version removes any doubt on this
score.
The revision will not restrict the
legitimate flow of factual information
requested by the legislators, who are in
the best 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) has been
to avoid such interference with formal
congressional heating and normal
informational interchange processes.
& Evidence of	Regarding
Current Lobbying Restrictions
Several commentera argued that too
few instances of the use of Federal
funds for lobbying activities had been
cited to justify the revision. However, as
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 violations or fraud that could
be prosecuted, or of mistakes in
application, so they could be collected.
Such items were typically carried on the
books 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
Dempsey, HUD's Inspector General and
Chairman of the Prevention Committee
of the President's Council on Integrity
and Efficiency, has stated that:
We do not believe that effective auditing of
the as* of Federal funds for lobbying
purposes is possible under the current OMB
Circular A-122. Moreover, we do not believe
that given the cmrent Circular, it is possible
to know or otherwise assess the extent to
which Federal fundi are used for lobbying
purposes.
However, even with the anient
auditing difficulties, a number of
instances have been uncovered in which
there is, at a Minimum 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's 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." He 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 Puhiie -
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-62-108.
•	GAO found that a mass
tranoportatin grantee prepared and
distribured a newsletter, a portion of
which urged its readers to write to the
Congress to support continued funding
of a "People Mover Project." The agency
was deemed responsible for not
informing its grantees that expenditures
of grant funds for this purpose were not
permissible. (B-202 975, November 3,
1081.)
As noted, the GAO in September 1882,
recommended a cost circular revision on
lobbying. And, as further noted, the
current revison 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. lie Proposed Revision Was Not
Sufficiently Restrictive
Many commenters argued that the
proposed revision was not sufficiently
restrictive to Ourb abuses in this area.
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 dollars 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 unallowable lobbying to
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
1c]ourt 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
revisioa* (1) Assess double or treble
damages against violators; (2) debar
violators from participating for five
years 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 af 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 "(n)onprofit
organizations should be required to
choose between political activism and
Federal subsidies. Preemption would
allow nonprofits 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.
-------
18268
Federal Register / Vol. 49. No. B3 / Friday. April 27, 1984 / -Notices
the 25% recordkeeping rule created an
unfortunate loophole. "A 10% rule'
would be more reasonable and would
still address the concerns of those
groups which lobby 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.
VIL Analysis of Comments and
Resulting Changes to Proposal
The revision creates a new paragraph
in Attachment B to Circular A-122. to be
called "B21 Lobbying." Paragraph B21
consists of three subparagraphs, which
in turn contain a total of thirteen
sections.
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, GSA. and NASA
procurement regulations, and «imilnr
authorities. Great care has been taken to
avoid prohibiting reimbursement for
activities that are legitimately necessary
to fulfill the purposes of a grant or
contract.
Subparagraph a defines five
categories of lobbying activities that are
unallowable for reimbursement It
should be read in conjunction with
subparagraph b. which establishes
exceptions to these provisions.
B.	Electioneering—Sections a (1) and
a(2).
Section a(l) makes unallowable
certain electioneering activities at the
Federal, state, or local levels. It applies
both to referenda, initiatives and similar
campaigns, as well as to elections of
candidates to office. The restrictions
should be familiar to nonprofit
organizations, since they are prohibited
by 28 U.S.C 501(c)(3). ThiB 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
interven[ing], directly or
indirectly* * \"
Section a(2) makes unallowable the
financial or administrative support of
political entities—including political
parties, compaigns. 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 agrees that the cost of
educational activities should be
allowable if they are educational and
nothing more. But if the activities go
further than helping persons 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 501(c)(4)
groups,-which face minimal restrictions
as to their political involvement As
noted 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 does not in any
respect limit an organization's right to
engage in campaign activities with its
own funds.
C Attempts To Influence Legislation—
Sections a(3) and a(4)
Section a(3) makes unallowable the
costs of attempts to influence Federal or
state legislation through contacts with
government officials. This section
confines the reach of unallowable
lobbying to legislative decisionmaking,
and 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. in
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 construct 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 likely to
require regular contacts with Executive
oficials in the ordinary course of
managing and performing the terms of
the grant or contract As stated above,
this is even more certain to be the case
at the local leveL The granting or
witholding of Executive consent to a bill
is an integral part of the legislative
process, however, so that this limitation
on Executive lobbying is appropriate.
One commenter. the Concho Valley
Center for Human Development
objected that "prohibiting lobbying at
-------
Federal Register / VoL 49. No. 83 / Friday. April 27, 1984 / Notices
18269
the state level would interfere with
business that is more appropriately the
purview of the state legislature." Ample
allowance is made in section 5(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 cprt«n
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 r-rnnpaigna concerning legislation.
Similar provisions are found in many
appropriations riders and have been
interpreted and applied by GAO on
many occasions. The definition of grass
roots lobbying in section a(4). however,
is less inclusive than that of the Internal
Revenue Code. It is limited to efforts to
obtain concerted actions on the part of
the public and. unlike the Code, it does
ot include attempts "to affect the
opinions of the general public," if such
attempts are not intended or designed in
such fashion as to have the reasonably
foreseeable consequence of leading to
concerted action. 28 U.S.C.
4911(d)(1)(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." See. e.g.,
Comp. Gen. Op. B-202S75 (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
an 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.
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 cgttfs which support or
facilitate pnsuing or developing
legislation before its formal
introduction. However, the key phrase
in the final version of sections a(3J 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 "influencing legislation."
Section a(3) tracks 28 U.S.C.
4911(d)(1)(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 4911(d)(1)(A), which
defines "influencing legislation" to
include "any attempt to influence any
[Federal state, or local] legislation
through any attempt to affect the
opinions of the general public or any
segment thereof." As previously noted,
sections a(3) and a(4) are narrower than
the comparable Code provisions in
several respects.
D. Legislative Liaison—section a(S)
Section a(5) makes unallowable the
cost of legislative liaison activities when -
they are in-furtherance of unallowable
activities as defined in sections a(l)-(4}.
While a key purpose of an
organization's "legislative Uaisaa"
activity may be to direct and prepare for
what has been defined in this revision
as 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 FAR. all legislative
liaison activities are deemed
unallowable.
OMB received more technical
comments on this section than any other
part of the proposal. Some commenters
argued that since the Internal Revenue
Code does not disallow "legislative
liaison" for purposes of determining
organizations' tax-exempt status, neither
should Circular A-122. However, the IRS
does not exempt legislative liaison
activities from 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 die tax status of entities,
but with the proper use of Federal funds
by recipient organizations. Use of the
term "legislative liaison" hi section
a(5)—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. Hie final 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 revison should
avoid unintended retroactivity problems
by not permitting auditors to
automatically disallow legislative
liaison costs in every instance where
they are associated with later efforts at
lobbying. While responsibility for
establishing the allowability of costs
rests, here as in all aspects of cost
reimbursement with the parties seeking
it the "knowing preparation" standard
of section a(5) 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 forseeable link with
later lobbying fall within the "knowing
preparation" standard of section a(5).
Finally, it should be noted in
connection with section a(5) 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
-------
18270
Federal Register / Vol. 49, No. 83 / Friday, April 27, 1984 /'.Notices
performing a "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 within the meaning of
section a(5).
£ Exceptions to Unallowable
Lobbying—Subparagraph b
Subparagraph b contains three
exceptions to activities disallowed
under subparagraph a. The
subparagraph does not necessarily make
the costs of these activities allowable;
allowability or unallowability of such
costs 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 allowability of costs or
expenditures.
Some commenters noted that the use
of the term "not unallowable" in the
introductory clause to this subparagraph
in the November proposal might indicate
a fine 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. e.g..
informational communications by
organizations with its members or the
distribution by organizations of
nonpartisan analyses, are not set forth
as separate sections of subparagraph b.
To the extent that those, or any other
activities, otherwise fall within the
definitional terms of any section of
subparagraph a, they are deemed
unallowable unless they fall within the
exceptions defined by subparagraph b.
F. Legislative Requests for Technical
and Factual Information—Section b(l)
Section b(l) exempts from
subparagraph a technical and 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 unless
they are for purposes of influencing
legislation, this exception is relevant
only to those legislative contracts 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
concerns expressed in the comments
and by members of the interested
Congressional committees.
The term "technical advice or
assistance," used in the November 1983
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"
was added after "technical" to clarify
that to be reimbursable, the services
rendered in a section b(l) situation must
be ovemdingly informational in purpose
and content and not advocatory.
However, the fact that an advocatory
conclusion is reached does not 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
"presentationfs]" which are in fact and
which would be clearly 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 communicating
the conclusion, provided of course that it
clearly and naturally flows from the
technical and factual data 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 added to the
scope provision, in response to a
Congressional suggestion. This change
helps clarify that with the exception of
travel, meals and lodging costs in
connection with a(3) lobbying, such
information need not necessarily be
tendered in formal testimony to fall
within 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 Congressional 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 not
specifically included in section b(l). As
indicated below, for its costs to 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 a 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. Linking 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 a bona fide
request for information of a truly factual
and technical nature, not 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 grantee,
and contractors could charge the
Federal government when undertaking
-------
Federal Register / VoL 49, No. 83 / Friday. April 27, 1984*/-Notices
18271
such lobbying. With the elimination of
the requirement far a written request.
Gd the addition of the provision
owing Congressional Record notices
to 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
die cost section b(l) has been revised to
require that the response must be
information that "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 to
requests.) Provision of such assistance
justifies invoking the exception only
when the information is known or
obtainable—end 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
[actual presentations 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 topic&g*
directly related to grant or contract^
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
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 &
technical and factual presentation. To
help ensure that the Federal financing of
lobbying trips to Washington is limited
to those which Congress deems
necessary to its decision-making, the
revision provides that these otherwise
restricted costs (travel lodging and
meals) can only be "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 tho 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. (See. Senate
Resolution 538,96-2; House Rule 35.)
The American Civil Liberties Union
challenged the entire section b(l)
exception on the grounds that linUng
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 Regan, 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 Code.
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. State Level Lobbying Related to
Performance of Grant or Contract—
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 is
permitted because it can directly benefit
the Federal government by helping
minimize the costs 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 the
greater clarity provided by the phrase
"to influence state legislation." Finally,
the phrase "or related activity"
after"lobbying" 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
commenters 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 50885.
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—Adminiatra tors of
two community-bated programs for the
mentally retarded led teveral hundred clients
in a demonstration here today in support of
bill* that would raise employes' salaries and
exempt their organizations from state
procurement laws ' * *
(The demonstration organizer] said that all
participants in today's demonstration had
been "educated intensively" about the reason
for the demonstration and had elected to
come, although some might have forgotten by
the time they arrived, he said * * *
Demonstration organizers defended the
tactic saying the bills, if approved, will
directly affect the clients by improving the
quality of care they receive * * * [See,
Washington Post, March 8, IBM. pp. CL C3.]
-------
18272
Federal Register / Vol. 49. No. 83 / Friday. April 27. 1904 /-Notices
Under the November 1983 proposal, a
strained argument could be made 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 better 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
subgrantees. 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 partisarT
political pressures, and a needless cause
of complexity for grant rules. Under
none of Circular A-122's other 50 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) in 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 are 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
subparagraph b. Hence, section c(2) has
been omitted entirely, since the only
Executive Branch contacts unallowable
in the first plaee 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
subparagraph b. the final version of the
subparagraph 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 Janury 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
Coats—Subparagraph c.
As with the Federal Acquisition
Regulation and as is already the case
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 00% of his time on lobbying
activities and 40% on Federal grant
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 5% of the time. The
OMB proposal published in January 1983
followed this stricter approach.
Commenters argued tljj 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 and
facilities. They also argued that 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 concerns and serves the goal of
assuring government neutrality by
disallowing reimbursement of Federally
appropriated funds used for certain
types of lobbying.
JC Indirect Cost Rate Proposal—section
cfl)
Subparagraph 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 to
tha t jib w 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 grant-by-grant basis. This
approach saves agencies and recipient
organizations considerable time and
effort in cases where the organization
receives more than one grant or
contract The revision has been modified
to reflect this approach. Further, section
c(l) follows existing accounting practice
and emphaaizes 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
-------
Federal Register / Vol. 48. No. 83 / Friday, April 27, 1984 / Notices
18273
.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 c(l) following
consultation with GAO and
Congressional staffs. In essence, only
the minimal information that is needed
for the calculation of 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 cost rate
proposal. This will allay concerns of
nonprofit groups that separate
accountings and disclosures were
mandated for each of the five
component definitions of lobbying set
forth in sections a(l)-e(5). Moreover,
since this information is made 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 reimbursemenf
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
ties 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.
When the existing Circular A-122
accounting requirements are reviewed in
conjunction with the uniquely lenient
recordkeeping treatment provided for
lobbying in section c(4] of the revision, it
becomes clear that 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. See. e&. 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 mayw misstated its
unallowable lobbying costs, they are not
constrained from requesting any data
normally accessible under Circulars A-
122 and A-110, as long as such data
does 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 costs spat on
unallowable activities. This requirement
is necessary so that when the
government calculates the amount of ah
organization's indirect costs [i.e„
overhead) that it will pay. it does not
include the costs of unallowable
activities that the organization happens
to account for as indirect costs.
Paragraph BJ3 of the existing x
Attachment A to Circular A-122 now
requires this;
The costs of certain activities are not
allowable as charge* to Federal awards (see.
for example, fond raising costs in paragraph
18 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 costs
for purposes of determining indirect cost
rates aiid 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.
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 Bhould pay for an
organization's indirect costs unless it
can determine what portion of the
organization's total indirect costs are
from allowable activities, and what
portion are unallowable. Such treatment
is currently required under Circular A-
122'i 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 ouCnot 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. There 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
rate proposal. OMB has determined that
it would make no sense to rely on
varying and what would almost
certainly be inconsistent initiatives of
individual auditors, regional offices and
agencies to inquire, as a matter of
standard practice, into whether lobbying
activities are 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.e.. disclosure only of a totaL
lamp sum lobbying cost 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 25% 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 OMB's judgment a
minimal requirement consistent with the
Circular's accounting guidelines.
-------
18274
Federal Register / Vol. 49. No. 83 / Friday. April 27. 1984 /iNotices
L. Certification Requirement—Section
c(2)
The requirement in section a(2) of the
November 1383 proposal, that
certification accompany the Financial
Statu* Report has been changed in the
final version to a requirement that
certification accompany an
organization's annual indirect cost rate
proposal. Since a Financial Status
Report is required for each grant that an
organization has, while an organization
must file only one indirect cost rate
proposal per year to cover all of its
grants, this change reduces paperwork
and administrative effort.
Further, lobbying expenses are
usually included in indirect costs, which
are calculated on an organization-wide
basis. Consequently, the appropriate
place to certify such costs is in the
annual indirect cost rate proposal, as
required under the Defense and GSA
proposed revisions. In addition, most
future audits will be "single audits" of
all Federal funds received by the
grantee, so there will be less emphasis
on the Financial Status Report and more
on the indirect cost rate proposal.
M. Recordkeeping—Sections c(3j and
G(4)
Documentation of the amounts of
allowable and 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" cost
treatment. The principal alternative
considered by OMB was to adopt the
documentation philosophy of the
restrictions on lobbying in the prior
Defense, GSA. and NASA procurement
regulations. i.e., 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 maintain
records (time logs, calendars, or the like)
to establish the proportion of their time
spent on lobbying. This would be of
particular concern for high level officials
of grantees and contractors who. in the
ordinary course of business, may engage
in only a small amount of lobbying.
OMB (along with Defense. GSA. 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-110:
"Grants and Agreements with
Institutions of Higher Education.
Hospitals, and Other Nonprofit
Organizations: Uniform Administrative
Requirement' (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,
"[financial records, supporting
documents, statistical records, and all
other records pertinent to [grants]," and
to access for audit purposes "pertinent
books, documents, papers and records
of * * * recipient organizations."
Section c(3) restates the general rule
for cost documentation, but is modified
by section c(4), which provides that for
the purposes of complying with this
tevision^employees are not required to
prepare or maintain time logs,
calendars, or similar records to
document the portion of their time
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
evidence not otherwise precluded. As
noted earlier, the absence of time logs or
comparable records for indirect cost
time not kept pursuant to the discretion
of the grantee or contractor will not
serve a^basis for government auditors
disallowing rlniwio of allowable costs by
contesting unallowable lobbying time
estimates except in two distinct
situations: first where the employee
spends more than 25% of his
compensated hours of employment
during a month lobbying; and. second,
where a material misstatement of costs
has been found within the preceding five
years. This avoids the necessity of
employees who engage in only
incidental lobbying having to account
for all of their time to Federal agendes.
Morever. by pairing each calendar
month an independent operative period
under section c(4), problems of
retroactivity are avoided by persons
unexpectedly required to engage in
intensive lobbying during the latter
portions of a larger operative period
such as a calendar year. Alternatively,
persons engaged in intensive lobbying
activities during the earlier portions of
such a longer operative period will not
lose the protection of section c(4) during
latter months of the longer period when
lobbying activities fall below the 25%
trigger.
However, It should be stressed that in
the exemption from "records which are
not kept" the primary sense of the word
"kept" was "created." Thus, records that
would otherwise be kept in the ordinary
course of business cannot be destroyed
simply to avoid audit inspection merely
because they are not required under this
exemption. For two significant reasons,
the last sentence of this section, as
proposed in the November 1983 version,
has been deleted. It stated:
Agency guidance regarding the extent and
nature of documentation required pursuant to
subparagraph (c)(3) (ball be reviewed under
the criteria of the Paperwork Reduction Act
to ensure that requirement* are the least
burdensome necessary to satisfy the
objectives of this subparagraph.
Co mm enters questioned why, if such a
provision was necessary in the first
place, other laws, such as the
Regulatory Flexibility Act were not
included. Such a reference to
compliance with existing laws is not
necessary, and the reference to the
Paperwork Reduction Act was included
to emphasize OMB's commitment that
the sprit of this law be followed in the
revision's implementation.
Morever, the Department of Health
and Human Services noted that the
sentence could have been read to give
agencies the mandate to develop their
own regulations. As there is no reason
for agencies to deviate from or add to
the Circular A-122 guidelines and as
agency deviations could result in
multiple rules for nonprofit entities—an
outcome not intended by OMB and one
which would create the potential for
inconsistent enforcement and excessive
paperwork—this sentence was
eliminated from the final version.
N. Administrative Restrictions on
Agencies—Section c(S)
Section c(5) requires agencies to
establish procedures for advance
resolution of definitional issues arising
under this revision. This will alleviate
the inevitable problems of interpretation
at the margin and will avoid
discouraging organizations from
engaging in borderline activities merely
because the application of the
provisions may be uncertain.
Section c(5) is not intended to impose
or authorize OMB micromanagement of
agencies which award grants or
contracts. Agencies typically have
methods of resolving disagreements or
differences with their grantees and
contractors, and such methods shall be
deemed adequate to meet the
requirements of section c(5), unless
OMB review of such procedures
determines that changes are necessary
to comply with the intent of this section.
O. Paragraph Renumbering Provision
Paragraph 2 renumbers paragraphs
B21 through B50 of Circular A-122'a
Attachment B. Since the cost items
covered under Attachment B are
numbered in alphabetical order.
-------
Federal Register / VoL 49, No. 83 / Friday. April 27, 1984 / Notices
18275
"Lobbying" is appropriately designated
aa paragraph B21, necessitating the
|renumbering of former paragraphs B21
through B50 as B22 through B51.
VIIL Paperwork Reduction Act
Coosiderationa
The November notice invited
"comments about the appropriateness of
coQection 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 those of other commenters but
raised no specific paperwork burden
issues.
The twenty-three other commenters
followed, almost verbatim, points raised
by the Center 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 ¦wtw«1
indirect cost proposal, and (2) maintain
the records required to demonstrate that
costs are allowable or unallowable.
However, by establishing uniform and
well-defined guidelines for lobbying
costs, 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 are
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 costs.
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
dear guidelines provided by this
revision, agency and audit enforcement
will increase, liiose grantees already in
compliance with the differing sets 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 already require
maintenance of detailed records.
In general. Circular A-122 will not
require employees to keep a second set
of books, e.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 [eg..
headquarters staff) employees, and
section c(4) states that employees who
certify that they spend less than 25% 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 rule for direct cost
time is necessary.
The 23 critics of the revision also
submitted identical comments to the
effect that "(t]ax 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
requirements will reduce the current
recordkeeping costs incurred to comply
with	restrictions.
Some commenters argued that
differing Internal Revenue Code and
Circular A-122 standards would require
maintenance of two sets of financial
books. No 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
orfBaiaaLiafaaftfttiaa^x—»'» Wm filing
m auilitinjuirmiuiils of the Internal
Revenue Service as 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.
IX. 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 are
incorporated in grants and contracts
through agencM* regulations or grant
instruments. The degree and nature of
enforcement of these anti-lobbyicg
provisions will depend, therefore, on
operational experience and competing
demands on enforcement resources.
1.	Voluntary compliance. The bedrock
forenforcing 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 muph
attention to them. This revision is
expected to improve compliance
significantly by:
• Defining unallowable activities so
that organizations 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 assist organizations in complying,
agencies are 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
prevision 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 funds to engage in lobbying.
Instead, penalties for violating this
revision are the same as for violations of
existing Circular A-122 provisions. The
principal sanction in the event of minor
or unintentional violations is cost
recovery. Le- the Federal agency will
obtain reimbursement from the
contractor or grantee of misspent funds.
In more 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 restrictions
of appropriations legislation has been
confirmed by the Office of Legal
Counsel of the Department of Justice.
X Audits. Contractors and grantees
are currently subject to audit
requirements, and to the possibility of
audit by agency Inspectors General or
the Comptroller General; however, only
rarely have audita focused oh
compliance with anti-lobbying
provisions due to the difficulty of
determining proper adherence to a
myriad of frequently vague restrictions.
After uniform cost principles are
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
-------
18276
Federal Register / VoL 49. No. 83 / Friday, April 27, 1984 /-Notices
incentive for greater compliance among
all grantees and contractors.
Alternatively, promulgating a defined
set of rules can and will serve as a
protection against audit harassment,
and will and should make for fairer and
simpler audits for grantees and
contractors. This should be of particular
benefit to smaller grantees and
contractors who lack the means and
support staff to contend with audits
under the vague, ambiguous, and diverse
rules now in effect. With expanded
Inspector General and agency audit
staffs now in place, the protections
afforded by the proposal are manifest.
X. Designation as "Non-Major" Riila
OMB Circulars ore not "rules" within
the meaning of the Administrative
Procedures Act or Executive Order No.
12291. Instead, they are management
directives by which OMB, on behalf of
the President, instructs Executive
Branch entities how to exercise their
authority in matters subject to agency
discretion. Even if the Circular were
considered a "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 $100 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 adverse effects on
competition, employment investment
productivity, innovation, or on the
ability of United States-based
enterprises to compete with foreign-
based enterprises in domestic or export
markets.
The principal effect of the revision
will be to ensure that Federal grant
funds are used for the purposes for
which they 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 Washington. D.G. April 25.1984.
Onrfic« C. Brymnt
Deputy Associate Director for
Administration.
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;
e.(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 (ii) the enactment or
modification of any pending Federal or
state legislation through communication
with any member or employee of the
Congress or state legislature (including
efforts to influence State or local
officials to engage in similar lobbying
activity), or 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 (ii) the enactment or
modification of any pending Federal or
state legislation by preparing,
distributing or using publicity or
propaganda, or by urging members of
the general public or any segment
thereof to contribute to or participate in
any mass demonstration,	rally,
fundraising drive, lobbying campaign or
letter writing or telephone campaign; or
a.(5)	Legislative liaison activities,
including attendance at legislative
sessions or committee hearings,
gathering information regarding
legislation, and analyzing the effect of
legislation, when such activities are
carried on in support of or in knowing
preparation for an effort to engage in
unallowable lobbying.
b.	The following activities are
excepted 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 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 a cognizant staff member
thereof; provided such information is
readily obtainable and can be readily
put in deliverable form; and further
provided that costs under this section
for 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 made unallowable
by section a.(3) to influence State
legislation in order to directly reduce the
tost or to avoid material impairment of
the organization's authority to perform
the grant 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
a(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 that 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 employees
during any calendar month unless: (i)
The employee engages in lobbying, as
defined in subparagraphs a and b. mo
than 25% of his compensated hours of
employment during that calendar month:
-------
Federal Register / VoL 4a No. 83 / Friday. April 27, 1964 7 Notices
18277
or (ii) the organization has materially
misstated allowable or unallowable
costs within the preceding five year
period.
c.(5] Agencies shall establish
procedures for resolving in advance, in
consultation with OMB. any significant
questions or disagreements concerning
the interpretation or application of
paragraph B21. Any such advance
resolution shall be binding in any
subsequent settlements, audits or
investigations with respect to that grant
or contract for purposes of
interpretation of this Circular provided,
however, that this shall not be construed
to prevent a contractor or grantee from
contesting the lawfulness of such a
determination.
2. Renumber subsequent paragraphs
of Attachment B.
[FR Oae. M-lUM PIM I ¦ It HI un|
BUMS COOS 81 m
-------
18278	Federal Register / Vol. 49, No. 83 / Friday, April 27,1984 / Rules and .Regulations
DEPARTMENT OF DEFENSE
-NERAL SERVICES
MINISTRATION
NATIONAL AERONAUTICS AND
SPACE ADMINISTRATION
48 CFR Part 31
[Fedecai Acquisition Circular 84-2]
Federal Acquisition Regulation
agencies: Department of Defense
(DoD), General Services Administration
(GSA). National Aeronautics and Space
Administration (NASA).
action: Final role.
summary: This Federal Acquisition
Circular (FAQ amends the Federal
Acquisition Regulation (FAR) with
respect to the lobbying cost principle in
the FAR subpart that covers contract
cost principles in contracts with
commercial organizations.
EFFECTIVE DATE: July 1.1984.
FOR FURTHER INFORMATION CONTACT:
Roger M. Schwartz, Director, FAR
fceaetariat Room 4041, GS Building.
Washington, D.C. 20405, Telephone (202)
523-4755.
SUPPLEMENTARY INFORMATION: The
.Office of Management and Budget
(OMB) has directed that the agencies
implement the intent and substance of
the OMB Circular A-122 lobbying cost .
principle in FAR Subpart 31£. 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 48 CFR Part 31
Government procurement
Rogsr M. Schwartz.
Director. FAR Secretariat
April 25.1984.
Federal Acquisition Circular
[Number 84-2]
Unless otherwise specified, all
ederal Acquisition Regulation (FAR)
and other directive material contained
in this Federal Acquisition Circular is
effective July 1.1984.
Patrida Q. SAwwl,
Acting Administrator of General Serrices.
{L^Evaaa,
Assistant Administrator for Procurement.
Mary Ann Gflliwra.
Deputy Under Secretary of Defense
(Acquisition Management).
Federal Acquisition Circular (FAC)
84-2 amends die Federal Acquisition
Regulation (FAR) as specified below.
The following is a summary of the
amendment:
Item 1 ¦ Lobbying Costs
The Office of Management and Budget
(OMB) has directed that 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 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.
Authority: 40 U.S.C. 466(c); Chapter 137,10
U^C: and 42 U.S.C. 2453(c).
PART 31—CONTRACT COST
PRINCIPLES AND PROCEDURES
«	•	t	«	•
1. Subsection 31£05-22 Is revised to
read as follows:
31.205-22 Lobbying coata.
(a) Costs associated with the
following activities are unallowable:
(1)	Attempts to inflmwirw 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
inttoduction of Federal or state
legislation, or (ii) the enactment or
modification of any pending Federal or
state legislation through communication
with any member or employee of the
Congress or state legislature (including
efforts to influence state or local
officials to engage in similar lobbying
activity), or 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 any segment
thereof to contribute to or participate in
any mass demonstration, march, rally,
fund raising drive, lobbying campaign or
letter writing or telephone campaign; or
(5)	Legislative liaison activities,
winding 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 are
excepted from the coverage of (a) 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 a cognizant staff member
thereof: provided such information is
readily obtainable and can be readily
put in deliverable form; and farther
provided that costs under this section
for transportation, lodging or meals are
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
rtiAiwnnn or Ranking Minority Member
of the Committee or Subcommittee
nnnrhirting such hearing.
(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's 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 costs.
(d)	Contractors shall submit as part of
their indirect cost rate proposals
a certification that the requirements and
-------
-------
FAC 84-25 JULY 1, 1987
PART 31—CONTRACT COST PRINCIPLES AND PROCEDURES
31.109 Advance agreements.
(a)	The extent of allowability of the cosu covered in
this part applies broadly to many accounting systems in
varying contract situations. Thus, the reasonableness
and allocability of certain costs may be difficult to
determine, particularly for firms or their divisions that
may not be under effective competitive restraints. To
avoid possible - subsequent disallowance or dispute
based on unreasonableness or nonallocability, contract-
ing officers and contractors should seek advance agree-
ment on the treatment of special or unusual costs.
However, an advance agreement is not an absolute
requirement and the absence of an advance agreement
on any cost will not, in itself, affect the reasonableness
or allocability of that cost.
(b)	Advance agreements may be negotiated either
before or during a contract but should be negotiated
before incurrence of the costs involved. The agree-
ments must be in writing, executed by both contracting
parties, and incorporated into applicable current and
future contracts. An advance agreement shall contain.a
statement of its applicability and duration.
(c)	The contracting officer b not authorized by this
31.109 to agree to'a treatment of costs inconsistent with
this part. For example, an advance agreement may not
provide that, notwithstanding 31.205-20, interest is al-
lowable.
(d)	Advance agreements may be negotiated with a
particular contractor for a single contract, a group of
contracts, or all the contracts of a contracting office,
an agency, or several agencies.
(e)	The cognizant administrative contracting officer
(ACO), or other contracting officer established in Part
42, shall negotiate advance agreements except that an
advance agreement affecting only one contract, or class
of contracts from a single contracting office, shall be
negotiated by a contracting officer in the contracting
office, or an ACO when delegated by the contracting
officer. When the negotiation authority is delegated,
the ACO shall coordinate the proposed agreement with
the contracting officer before executing the advance
agreement.
(0 Before negotiating an advance agreement, the
Government negotiator shall—
(1)	Determine if other contracting offices inside
the agency or in other agencies have a significant
unliquidated dollar balance in contracts with the
same contractor;
(2)	Inform any such office or agency of the mat-
ters under consideration for negotiation; and
(3)	As appropriate, invite the office or agency and
the cognizant audit agency to participate in prenego-
tiation discussions and/or in the subsequent negotia-
tions.
(g) Upon completion of the negotiation, the sponsor
shall prepare and distribute to other interested agencies
and offices, including the audit agency, copies of the
executed agreement and a memorandum providing the
information specified in IS.808, Price negotiation
31.201-2
memorandum, as applicable.
(h) Examples of costs for which advance agreements
may be particularly important are—
<1) Compensation for personal services, including
but not limited to allowances for off-site pay, incen-
tive pay, location allowances, hardship pay, and cost
of living differential;
(2)	Use charges for fully depreciated assets;
(3)	Deferred maintenance costs;
(4)	Precontract costs;
(3) Independent research and development and bid
and proposal costs;
(6)	Royalties and other costs for use of patents;
(7)	Selling and distribution costs;
(8)	Travel and relocation costs, as related to special
or mass personnel movements, as related to travel via
contractor-owned, -leased, or -chartered aircraft; or as
related to maximum per diem rates;
(9)	Costs of idle facilities and idle capacity;
(10)	Costs of automatic data processing equipment;
(11)	Severance pay to employees on support serv-
ice contracts;
(12)	Plant reconversion;
(13)	Professional services (e.g., legal, accounting,
and engineering);
(14)	General and administrative costs (e.g., corpo-
rate, division, or branch allocations) attributable to
the general management, supervision, and conduct of
the contractor's business as a whole. These costs are
particularly significant in construction, job-site, ar-
chitect-engineer, facilities, and Government-owned
contractor operated (GOCO) plant contracts (see
31.203(f));
(15)	Costs of construction plant and equipment
(see 31.105(d));
(16)	Costs of public relations and advertising; and
(17)	Training and education costs (see 31.205-
44(h)).
SUBPART 31 J—CONTRACTS WITH
COMMERCIAL ORGANIZATIONS
3L201 GeneraL
3L201-1 Composition of total cost
The total cost of a contract is the sum of the allow-
able direct and indirect costs allocable to the contract,
incurred or to be incurred, less any allocable credits,
plus any allocable cost of money pursuant to 31.205-10.
In ascertaining what constitutes a cost, any generally
accepted method of determining or estimating costs
that is equitable and is consistently applied may be
used, including standard costs properly adjusted for
applicable variances. See 31.201-2(b) and (c) for Cost
Accounting Standards (CAS) requirements.
31.201-2 Determining allowability.
(a) The factors to be considered in determining
whether a cost is allowable include the following:
(1)	Reasonableness.
(2)	Allocability.
(3)	Standards promulgated by the CAS Board, if
applicable; otherwise, generally accepted accounting
31-7
-------
FAC 84-26
31.201-3	
principles and practices appropriate to the particular
circumstances.
(4)	Terms of the contract
(5)	Any limitations set forth in this subpart.
(b)	Certain cost principles in this subpart incorporate
the measurement, assignment, and allocability rules of
selected CAS and limit the allowability of costs to the
amounts determined using the criteria in those selected
standards. Only those CAS or portions of standards
specifically made applicable by the cost principles in
this subpart are mandatory unless the contract is CAS-
covered (see Part 30). Business units that are not other-
wise subject to these standards under a CAS clause are
subject to the selected standards only for the purpose
of determining allowability of costs on Government
contracts. Including the selected standards in the cost
principles does not subject the business unit to any
other CAS rules and regulations. The applicability of
the CAS rules and regulations is determined by the
CAS clause, if any, in the contract and the require-
ments of the standards themselves.
(c)	When contractor accounting practices are incon-
sistent with this Subpan 31.2. costs resulting from such
inconsistent practices shall not be allowed in excess of
the amount that would have resulted from using prac-
tices consistent with this subpart.
31.201-3 Determining reasonableness.
(a)	A cost is reasonable if, in its nature and amount,
it does not exceed that which would be incurred by a pru-
dent person in the conduct of competitive business. Rea-
sonableness of specific costs must be examined with par-
ticular care in connection with firms or their separate di-
visions that may not be subject to effective competitive
restraints. No presumption of reasonableness shall be at-
tached to the incurrence of costs by a contractor. If an
initial review of the facts results in a challenge of a spe-
cific cost by the contracting officer or the contracting of-
ficer's representative, the burden of proof shall be upon
the contractor to establish that such cost is reasonable.
(b)	What is reasonable depends upon a variety of
considerations and circumstances, including—
(1)	Whether it is the type of cost generally recog-
nized as ordinary and necessary for the conduct of the
contractor's business or the contract performance;
(2)	Generally accepted sound business practices,
arm's length bargaining, and Federal and State laws
and regulations;
(3)	The contractor's responsibilities to the Govern-
ment, other customers, the owners of the business, em-
ployees, and the public at large; and
(4)	Any significant deviations from the contrac-
tor's established practices.
31.201-4 Determining allocability.
A cost is allocable if it is assignable or chargeable to
one or more cost objectives on the basis of relative
benefits recetved or other equitable relationship. Sub-
JULY 30,1987
FEDERAL ACQUISITION REGULATION (FAR)
ject to the foregoing, a cost is allocable to a Govern-
ment contract if it—
(a)	Is incurred specifically for the contract;
(b)	Benefits both the contract and other work, anc
can be distributed to them in reasonable proportion to
the benefits received; or
(c)	Is necessary to the overall operation of the busi-
ness, although a direct relationship to any particular
cost objective cannot be shown.
31.201-5 Credits.
The applicable portion of any income, rebate, allow-
ance, or other credit relating to any allowable cost and
received by or accruing to the contractor shall be cred-
ited to the Government either as a cost reduction or by
cash refund.
31.201-6 Accounting for unallowable costs.
(a)	Costs that are expressly unallowable or mutually
agreed to be unallowable, including mutually agreed to
be unallowable directly associated costs, shall be identi-
fied and excluded from any billing, claim, or proposal
applicable to a Government contract. A directly associ-
ated cost is any cost which is generated solely as a
result of incurring another cost, and which would not
have been incurred had the other cost not been in-
curred. When an unallowable cost is incurred, its di-
rectly associated costs are also unallowable.
(b)	Costs which specifically become designated as
unallowable or as unallowable directly associated costs
of unallowable costs as a result of a written decision
furnished by a contracting officer shall be identified if
included in or used in computing any billing, claim, or
proposal applicable to a Government contract. This
identification requirement applies also to any costs in-
curred for the same purpose under like circumstances
as the costs specifically identified as unallowable under
either this paragraph or paragraph (a) above.
(c)	The detail and depth of records required as
backup support for proposals, billings, or claims shall
be that which is adequate to establish and maintain
visibility of identified unallowable costs, including di-
rectly associated costs. Unallowable costs involved in
determining rates used for standard costs, or for indi-
rect cost proposals or billing, need be identified only at
the time rates are proposed, established, revised, or
adjusted. These requirements may be satisfied by any
form of cost identification which is adequate for pur-
poses of contract cost determination and verification.
(d)	If a directly associated cost is included in a cost
pool which is allocated over a base that includes the
unallowable cost with which it is associated, the direct-
ly associated cost shall remain in the cost pool. Since
the unallowable costs will attract their allocable share
of costs from the cost pool, no further action is rr
quired to assure disallowance of the directly associateu
costs. In all other cases, the directly associated costs, if
material in amount, must be purged from the cost pool
as unallowable costs.
31-8
-------
FAC 84-15	APRIL 7,1986
PART 31—CONTRACT COST PRINCIPLES AND PROCEDURES
31.203
(e) (1) In determining the materiality of a directly
| associated cost, consideration should be given to the
mificance of (i) the actual dollar amount, (ii) the
nulative effect of all directly associated costs in a
jst pool, or (iii) the ultimate effect on the cost of
Government contracts.
(2)	Salary expenses of employees who participate
in activities that generate unallowable costs shall be
treated as directly associated costs to the extent of
the time spent on the proscribed activity, provided
the costs are material in accordance with subpara-
graph (eXl) above (except when such salary ex-
penses are. themselves, unallowable). The time spent
in proscribed activities should be compared to total
time spent on company activities to determine if the
costs are material. Time spent by employees outside
the normal working hours should not be considered
except when it is evident that an employee engages
so frequently in company activities during periods
outside normal working hours as to indicate that
such activities are a part of the employee's regular
duties.
(3)	When a selected item of cost under 31.205
provides that directly associated costs be unallowa-
ble, it is intended that such directly associated costs
be unallowable only if determined to be material in
amount in accordance with the criteria provided in
subparagraphs (e)(1) and (e)(2) above, except in those
situations where allowance of any of the directly
associated costs involved would be considered to be
contrary to public policy.
31.201-7 Construction and architect-engineer contracts.
Specific principles and procedures for evaluating and
determining costs in connection with contracts and sub-
contracts for construction, and architect-engineer con-
tracts related to construction projects, are in 31.105.
The applicability of these principles and procedures is
set forth in 31.000 and 31.100.
31.202 Direct costs.
(a)	A direct cost is any cost that can be identified
specifically with a particular final cost objective. No
final cost objective shall have allocated to it as a direct
cost any cost, if other costs incurred for the same
purpose in like circumstances have been included in
any indirect cost pool to be allocated to that or any
other final cost objective. Costs identified specifically
with the contract are direct costs of the contract and
are to be charged directly to the contract. All costs
specifically identified with other final cost objectives of
the contractor are direct costs of those cost objectives
and are not to be charged to the contract directly or
indirectly.
(b)	For reasons of practicality, any direct cost of
\or dollar amount may be treated as an indirect cost
the accounting treatment—
(1) Is consistently applied to all final cost objec-
tives; and
(2) Produces substantially the same results as treat-
ing the cost as a direct cost
31.203 Indirect costs.
(a)	An indirect cost is any cost not directly identified
with a single, final cost objective, but identified with
two or moTe final cost objectives or an intermediate
cost objective. It is not subject to treatment as a direct
cost. After direct costs have been determined and
charged directly to the contract or other work, indirect
costs are those remaining to be allocated to the several
cost objectives. An indirect cost shall not be allocated
to a final cost objective if other costs incurred for the
same purpose in like circumstances have been included
as a direct cost of that or any other final cost objective.
(b)	Indirect costs shall be accumulated by logical
cost groupings with due consideration of the reasons
for incurring such costs. Each grouping should be de-
termined so as to permit distribution of the grouping on
the basis of the benefits accruing to the several cost
objectives. Commonly, manufacturing overhead, selling
expenses, and general and administrative (G&A) ex-
penses are separately grouped. Similarly, the particular
case may require subdivision of these groupings, e.g.,
building occupancy costs might be separable from
those of personnel administration within the manufac-
turing overhead group. This necessitates selecting a
distribution base common to all cost objectives to
which the grouping is to be allocated. The base should
be selected so as to permit allocation of the grouping
on the basis of the benefits accruing to the several cost
objectives. When substantially the same results can be
achieved through less precise methods, the number and
composition of cost groupings should be governed by
practical considerations and should not unduly compli-
cate the allocation.
(c)	Once an appropriate base for distributing indirect
costs has been accepted, it shall not be fragmented by
removing individual elements. All items properly in-
cludable in an indirect cost base should bear a pro rata
share of indirect costs irrespective of their acceptance
as Government contract costs. For example, when a
cost input base is used for the distribution of G&A
costs, all items that would properly be pan of the cost
input base, whether allowable or unallowable, shall be
included in the base and bear their pro rata share of
G&A costs.
(d)	The contractor's method of allocating indirect
costs shall be in accordance with standards promulgat-
ed by the CAS Board, if applicable to the contract;
otherwise, the method shall be in accordance with gen-
erally accepted accounting principles which are con-
sistently applied. The method may require examination
when—
(1) Substantial differences occur between the cost
patterns of work under the contract and the contrac-
tor's other work;
31-9
-------
31-204
FAC 84-15
APRIL 7,1986
FEDERAL ACQUISITION REGULATION (FAR)
(2)	Significant changes occur in the nature of the
business, the extent of subcontracting, fixed-asset im-
provement programs, inventories, the volume of sales
and production, manufacturing processes, the con-
tractor's products, or other relevant circumstances;
or
(3)	Indirect cost groupings developed for a con-
tractor's primary location are applied to offsite loca-
tions. Separate cost groupings for costs allocable to
offsite locations may be necessary to permit equitable
distribution of costs on the basis of the benefits ac-
cruing to the several cost objectives.
(e) A base period for allocating indirect costs is the
cost accounting period during which such costs are
incurred and accumulated for distribution to work per-
formed in that period. The criteria and guidance in
CAS 406 for selecting the cost accounting .periods to
be used in allocating indirect costs are incorporated
herein for application to contracts subject to full CAS
coverage. For contracts subject to modified CAS cov-
erage and for non-CAS-covered contracts, the base
period for allocating indirect costs will normally be the
contractor's fiscal year. But a shorter period may be
appropriate (1) for contracts in which performance in-
volves only a minor portion of the fiscal year or (2)
when it is general practice in the industry to use a
shorter period. When a contract is performed over an
extended period, as many base periods shall be used as
are required to represent the period of contract per-
formance.
(0 Special care should be exercised in applying the
principles of paragraphs (b), (c), and (d) above when
Government-owned contractor-operated (GOCO)
plants are involved. The distribution of corporate, divi-
sion, or branch office G&A expenses to such plants
operating with little or no dependence on corporate
administrative activities may require more precise cost
groupings, detailed accounts screening, and carefully
developed distribution bases.
31.204 Application of principles and procedures.
(a)	Costs shall be allowed to the extent they are
reasonable, allocable, and determined to be allowable
under 31.201, 31.202, 31.203, and 31.205. These criteria
apply to all of the selected items that follow, even if
particular guidance is provided for certain items for
emphasis or clarity.
(b)	Costs incurred as reimbursements or payments to
a subcontractor under a cost-reimbursement, fixed-price
incentive, or price redeterminable type subcontract of
any tier above the first finn-fixed-price subcontract or
fixed-price subcontract with economic price adjustment
provisions are allowable to the extent that allowance is
consistent with the appropriate subpart of this Part 31
applicable to the subcontract involved. Costs incurred
as payments under firm-fixed-price subcontracts or
fixed-price subcontracts with economic price adjust-
ment provisions or modifications thereto, when cost
analysis was performed under 13.805-3, shall be allow-
able only to the extent that the price was negotiated in
accordance with 31.102.
(c) Section 31.205 does not cover every element of
cost. Failure to include any item of cost does not imply
that it is either allowable or unallowable. The determi-
nation of allowability shall be based on the principles
and standards in this subpart and the treatment of simi-
lar or related selected items.
31.205 Selected costs.
31.205-1 Public relations and advertising costs.
(a)	"Public relations" means all functions and ac-
tivities dedicated to—
(1)	Maintaining, protecting, and enhancing the im-
age of a concern or its products; or
(2)	Maintaining or promoting reciprocal under-
standing and favorable relations with the public at
large, or any segment of the public. The term public
relations includes activities associated with areas such
as advertising, customer relations, etc.
(b)	"Advertising" means the use of media to promote
the sale of products or services and to accomplish the ac-
tivities referred to in paragraph (d) of this subsection,
regardless of the medium employed, when the advertiser
has control over the form and content of what will ap-
pear, the media in which it will appear, and when it will
appear. Advertising media include but are not limited to
conventions, exhibits, free goods, samples, magazines,
newspapers, trade papers, direct mail, dealer cards, win-
dow displays, outdoor advertising, radio, and television.
(c)	Public relations and advertising costs include the
costs of media time and space, purchased services per-
formed by outside organizations, as well as the applicable
portion of salaries, travel, and fringe benefits of
employees engaged in the functions and activities iden-
tified in paragraphs (a) and (b) of this subsection.
(d)	The only advertising costs that are allowable are
those specifically required by contract, or that arise from
requirements of Government contracts and that are ex-
clusively for—
(1)	Recruiting personnel required for performing
contractual obligations, when considered in conjunc-
tion with all other recruitment costs (but see
31.205-34);
(2)	Acquiring scarce items for contract perfor-
mance; or
(3)	Disposing of scrap or surplus materials acquired
for contract performance.
Costs of this nature, if incurred for more than one
Government contract or both Government work and
other work of the contractor, are allowable to the ex-
tent that the principles in 31.201-3, 31.201-4. and
31.203 are observed.
(e)	Allowable public relations costs include the follow-
ing:
(1) Costs specifically required by contract.
31-10
-------
FAC 84-15	APRIL 7,1986
PART 31—CONTRACT COST PRINCIPLES AND PROCEDURES
31.20S-2
(2)	Costs of —
(i)	Responding to inquiries on company policies
and activities;
(ii)	Communicating with the public, press,
stockholders, creditors, and customers; and
(iii)	Conducting general liaison with news media
and Government public relations officers, to the ex-
tent that such activities are limited to communica-
tion and liaison necessary to keep the public in-
formed on matters of public concern such as notice
of contract awards, plant closings or openings,
employee layoffs or rehires, financial information,
etc.
(3)	Costs of participation in community service ac-
tivities (e.g., blood bank drives, charity drives, savings
bond drives, disaster assistance, etc.).
(4)	Costs of plan; tours and open houses (but see
subparagraph (0(5) of this subsection).
(5)	Costs of keel laying, ship launching, commis-
sioning, and^ roll-out ceremonies, to the extent
specifically provided for by contract.
(0 Unallowable public relations and advertising costs
include the following:
(1)	All advertising costs other than those specified in
^ paragraph (d) of this subsection.
(2)	Costs of air shows and other special events, such
as conventions and trade shows, including —
(i)	Costs of displays, demonstrations, and ex-
hibits;
(ii)	Costs of meeting rooms, hospitality suites,
and other special facilities used in conjunction with
shows and other special events; and
(iii)	Salaries and wages of employees engaged in
setting up and displaying exhibits, making demon-
strations, and providing briefings.
(3)	Costs of sponsoring meetings, symposia,
seminars, and other special events when the principal
purpose of the event is other than dissemination of
technical information or stimulation of production.
(4)	Costs of ceremonies such as corporate celebra-
tions and new product announcements.
(5)	Costs of promotional material, motion pictures,
videotapes, brochures, handouts, magazines, and
other media that are designed to call favorable atten-
tion to the contractor and its activities (but see
31.205- 13(a), Employee morale, health, welfare, food
service, and dormitory costs and credits; 31.205-21,
Labor relations costs; 31.205-43(c), Trade, business,
technical, and professional activity costs; and
31.205-44, Training and educational costs).
(6)	Costs of souvenirs, models, imprinted clothing,
buttons, and other mementos provided to customers or
the public.
(7)	Costs of memberships in civic and community
organizations.
(8)	All public relations costs, other than those
specified in paragraph (e) of this subsection, whose
primary purpose is to promote the sale of products or
services by stimulating interest in a product or product
line (except for those costs made allowable under
31.205-38(c)), or by disseminating messages calling
favorable attention to the contractor for purposes of
enhancing the company image to sell the company's
products or services. Nothing in this subparagraph
(0(8) modifies the express unallowability of costs listed
in subparagraphs (0(2) through (0(7)- The purpose of
this subparagraph is to provide criteria for determining
whether costs not specifically identified should be
unallowable.
(g) Costs made specifically unallowable under this
subsection 31.205-1 are not made allowable under subsec-
tions of Subpart 31.2 such as 31.205-13, Employee
morale, health, welfare, food service, and dormitory
costs and credits; 31.205-22, Legislative lobbying costs;
31.205-34, Recruitment costs; 31.205-38, Selling costs;
31.205-43, Trade, business, technical, and professional
activity costs; or 31.205-44, Training and educational
costs. Conversely, costs that are specifically unallowable
under these and other subsections of Subpart 31.2 are not
made allowable under this subsection.
31.205-2 Automatic data processing equipment leasing
costs.
(a) This subsection applies to all contractor-leased
automatic data processing equipment (ADPE), as de-
fined in 31.001 (except as components of an end item to
be delivered to the Government), acquired under oper-
ating leases, as defined in Statement of Financial Ac-
counting Standard No. 13 (FAS-13), Accounting for
Leases, issued by the Financial Accounting Standards
Board. Compliance with 31.205-1 l(m) requires that
(The next page is 31-11.)
31-10.1
-------
PART 31—CONTRACT-COST-PRINCIPLES AND PROCEDURES
3L205-2
ADPE acquired by means of capital leases, as defined
in FAS-13, shall be treated as purchased assets; i.e., be
capitalized and the capitalized value of such assets be
distributed over their useful lives as depreciation
charges or over the leased life as amortization charges
as appropriate. Allowability of costs related to contrac-
tor-owned ADPE is governed by other requirements of
this subpart.
(b) (1) If the contractor leases ADPE but cannot
demonstrate, on the basis of facts existent at the time of
the decision to lease or continue leasing and document-
ed in accordance with paragraph (d) below, that leas-
ing will result in less cost to the Government over the
anticipated useful life (see paragraph (c) below), then
rental costs are allowable only up to the amount that
would be allowed had the contractor purchased the
ADPE.
(2)	The costs of leasing ADPE are allowable only
to the extent that the contractor can annually dem-
onstrate in accordance with paragraph (d) below
(whether or not the term of lease is renewed or
otherwise extended) that these costs meet the follow-
ing criteria:
CO The costs are reasonable and necessary foi
the conduct of the contractor's business in light of
factors such as the contractor's requirements for
ADPE, costs of comparable facilities, the various
types of leases available, and the terms of the
rental agreement.
(ii)	The costs do not give rise to a material
equity in the facilities (such as an option to renew
or purchase at a bargain rental or price other than
that normally given to industry at large) but repre-
sent charges only for the current use of the equip-
ment, including incidental service costs such as
maintenance, insurance, and applicable taxes.
(iii)	The contracting officer's approval was ob-
• tained for the leasing arrangement (see subpara-
graph (d)(3) below) when the total cost of leas-
ing—
(A) The ADPE is to be allocated to one or
more Government contracts which require ne-
gotiating or determining costs, or
' (B) ADPE in a single plant, division, or cost
center exceeds S500,000 a year and SO percent
or more of the total leasing cost is to be allo-
cated to one or more Government contracts
which require negotiating or determining costs.
(3)	Rental costs under a sale and leaseback ar-
rangement are allowable only up to the amount that
would have been allowed had the contractor re-
tained title to the ADPE.
(4)	Allowable rental costs of ADPE leased from
any division, subsidiary, or organization under a
common control are limited to the cost of ownership
(excluding interest or other costs unallowable under
this Subpart 31.2 and including the cost of money
(see 31.205-10)). When there is an established prac-
tice of leasing the same or similar equipment to unaf-
filiated lessees, rental costs shall be allowed in ac-
cordance with subparagraphs (b)(1) and (2) above,
except that the purchase price and costs of O'
ship shall be determined under 31.20S-26(e).
(c)	(1) An estimate of the anticipated useful Iii.
the ADPE may represent the application life (utility in
a given function), technological life (utility before be-
coming obsolete in whole or in part), or physical life
(utility before wearing out) depending upon the facts
and circumstances and the particular facilities involved.
Each case must be evaluated individually. In estimating
anticipated useful life, the contractor may use the appli-
cation life if it can be demonstrated that the ADPE has
utility only in a given function and the duration of the
function can be determined. Technological life may be
used if the contractor can demonstrate that existing
ADPE must be replaced because of—
0) Specific program objectives or contract re-
quirements that cannot be accomplished with the
existing ADPE;
(ii)	Cost reductions that will produce identifiable
savings in production or overhead costs;
(iii)	Increase in workload volume that cannot be
accomplished efficiently by modifying or augment-
ing existing ADPE; or
(iv)	Consistent pattern of capacity operation (2
Vi-3 shifts) on existing ADPE.
(2)	Technological advances will not justify
ing existing ADPE before the end of its physic*.
if it will be able to satisfy future requirements or
demands.
(3)	In estimating the least cost to the Government
for useful life, the cumulative costs that would be
allowed if the contractor owned the ADPE should
be compared with cumulative costs that would be
allowed under any of the various types of leasing
arrangements available. For the purpose of this com-
parison, the costs of ADPE exclude interest' or other
unallowable costs pursuant to this Subpart 31.2; they
include but are not limited to the costs of operation,
Tnnfnt>»npT»rv» insurance, depreciation, facilities capital
cost of money, rental, and the cost of machine serv-
ices, as applicable.
(d)	(1) Except as provided in subparagraph (3)
below, the contractor's justification, under paragraph
(b) above, of the leasing decisions shall consist of the
following supporting data, prepared before acquisition:
(i)	Analysis of use of existing ADPE.
(ii)	Application of the criteria in paragraph (b)
above.
(iii)	Specific objectives or requirements, g^~
ly in the form of a data system study and sj
tion.
(iv)	Solicitation of proposals, based on the data
system specification, from qualified sources.
31-11
-------
31.205-3
FEDERAL ACQUISmON REGULATION (FAR)
(v) Proposals received in response to the solici-
tation and reasons for selecting the equipment
chosen and for the decision to lease.
(2)	Except as provided in subparagraph (3) below,
the contractor's annual justification, under subpara-
graph (b)(2) above, of the decision to retain or
change existing ADPE capability and the need to
continue leasing shall consist of current data as speci-
fied in subdivisions (dXIXQ through (iii) above.
(3)	If the contractor's prospective ADPE lease
cost meets the threshold in 31.205*2(b)(2)(iii) above,
the contractor shall furnish data supporting the initial
decision to lease (see subparagraph (b)(1) above). If
the total cost of leasing ADPE in a single plant,
division, or cost center exceeds 5500,000 per year
and SO percent or more of the total leasing cost is
allocated to Government contracts which require ne-
gotiating or determining costs, the contractor shall
furnish data supporting the annual justification for
retaining or changing existing ADPE capability and
the need to continue leasing shall also be furnished
(see subparagraph (b)(2) above).
31-205-3 Bad debts.
Bad debu. including actual or estimated losses arising
from uncollectible accounts receivable due from cus-
*omers and other claims, and any directly associated
rets such as collection costs, and legal costs are un-
Jlowable.
31.205-4 Bonding costs.
(a)	Bonding costs arise when the Government re-
quires assurance against financial loss to itself or others
by reason of the act or default of the contractor. They
arise also in instances where the contractor requires
similar assurance. Included are such bonds as bid. per-
formance. payment, advance payment, infringement,
and fidelity bonds.
(b)	Costs of bonding required pursuant to the terms
of the contract are allowable.
(c)	Costs of bonding required by the contractor in
the general conduct of its business are allowable to the
extent that such bonding is in accordance with sound
business practice and the rates and premiums are rea-
sonable under the circumstances.
31.205-5 Ciril defense costs.
(a) Civil defense costs are those incurred in planning
for, and protecting life and property against, the possi-
ble effects of enemy attack. Costs of civil defense meas-
ures (including costs in excess of normal plant protec-
tion costs, first-aid training and supplies, fire fighting
training and equipment, posting of additional exit no-
nces and directions, and other approved civil defense
sasures) undertaken on the contractor's premises pur-
iant to suggestions or requirements of civil defense
authorities are allowable when allocated to all work of
the contractor.
(b)	Costs of capital assets acquired for civil defense
purposes are allowable through depreciation (see
31.203-11).
(c)	Contributions to local civil defense funds and
projects are unallowable.
31.205-6 Compensation for personal services.
(a) Gtntral. Compensation for personal services in-
cludes all remuneration paid currently or accrued, in
whatever form and whether paid immediately or de-
ferred, for services rendered by employees to the con-
tractor during the period of contract performance
(except as otherwise provided for severance pay costs
in paragraph (g) below and for pension costs in para-
graph (j) below). It includes, but is not limited to,
salaries: wages; directors' and executive committee
members' fees; bonuses (including stock bonuses); in-
centive awards; employee stock options, stock appre-
ciation rights, and stock ownership plans; employee
insurance; fringe benefits; contributions to pension, an-
nuity, and management employee incentive compensa-
don plans; and allowances for off-site pay, incentive
pay, location allowances, hardship pay, severance pay,
and cost of living differential. Compensation for per-
sonal services is allowable subject to the following
general criteria and additional requirements contained
in other pans of this cost principle:
*(1) Compensadon for personal services must be for
work performed by the employee in the current year
and must not represent a retroactive adjustment of
prior years' salaries or wages (but see 3l.205-6(g),
(h), 0). 00. and (m) below).
(2)	The compensadon in total must be reasonable
for the work performed; however, specific restric-
tions on individual compensadon elements must be
observed where they are prescribed.
(3)	The compensadon must be based upon and
conform to the terms and conditions of the contrac-
tor's established compensadon plan or practice fol-
lowed so consistently as to imply, in effect, an agree-
ment to make the payment.
(4)	No presumption of allowability will exist
where the contractor introduces major revisions of
existing compensadon plans or new plans and the
contractor—
(i)	Has not notified the cognizant ACO of the
changes either before their implementation or
within a reasonable period after their implementa-
tion, and
(ii)	Has not provided the Government, either
before implementation or within a reasonable
period after it. an opportunity to review the
allowability of the changes.
(5)	Costs that are unallowable under other para-
graphs of this Subpart 31.2 shall not be allowable
under this subsection 31-205-3 solely on the basis that
they constitute compensation for personal services.
(See 31J205-34(c.))
31-12
-------
FAC 84-15	APRIL 7,1986
PART 31—CONTRACT COST PRINCIPLES AND PRQCP.niJttPS 	
31_205-*
(b) Reasonableness. (1) The compensation for per-
sonal services paid or accrued to each employee must be
reasonable for the work performed. Compensation will
be considered reasonable if each of the allowable
elements making up the employee's compensation
package is reasonable. In determining the reasonableness
of individual elements for particular employees or classes
of employees, consideration should be given to all poten-
tially relevant facts. Facts which may be relevant include
general conformity with the compensation practices of
other firms of the same size, the compensation practices
of other firms in the same industry, the compensation
practices of other firms in the same geographic area, the
compensation practices of firms engaged in pre-
dominantly non-Government work, and the cos: of com-
parable services obtainable from outside sources. While
all of the above factors, as well as any other relevant
ones, should be considered, their relative significance will
vary according to circumstances. For example, in the case
of secretarial salaries, conformity with the compensation
paid by other firms in the same geographic area would
likely be a more significant criterion than conformity
with the compensation paid by other firms in the same in-
dustry wherever locaiid. In administering this principle,
it is recognized that not every compensation case need be
subjected in detail to the above or other tests. The tests
need be applied only when a general review reveals
amounts or types of compensation that appear
unreasonable or unjustified. Based on an initial review of
the facts, contracting officers or their representatives
may challenge the reasonableness of any individual ele-
ment or the sum of the individual elements of compensa-
tion paid or accrued to particular employees or classes of
employees. In such cases, there is no presumption of
reasonableness and, upon challenge, the contractor
must demonstrate the reasonableness of the compensa-
tion item in question. In doing so, the contractor may in-
troduce, and the contracting officer will consider, not on-
ly any circumstances surrounding the compensation item
challenged, but also the magnitude of other compensa-
tion elements which may be lower than would be con-
sidered reasonable in themselves. For example, a contrac-
tor, if challenged on the amount of base salaries for
management, could counter by showing lower than nor-
mal end-of-year management bonuses. However, the
contractor's right to introduce offsetting compensation
elements into consideration is subject to the following
limitations:
(i)	Offsets will be considered only between the
allowable elements of an employee's (or a class of
employees') compensation package. For example,
excessive management salaries cannot be offset
against lower than normal secretarial salaries.
(ii)	Offsets will be considered only between the
allowable portion of the following compensation
elements of employees or classes of employees:
(A) Wages and salaries.
(B)	Incentive bonuses.
(C)	Deferred compensation.
(D)	Pension and savings plan benefits.
(E)	Health insurance benefits.
(F)	Life insurance benefits.
(C) Compensated personal absence benefits.
However, any of the above elements or portions
thereof, whose amount is not measurable, shall not
be introduced or considered as an offset item.
(iii) In considering offsets, the magnitude of the
compensation elements in question must be taken in-
to account. An executive bonus that is excessive by
S 100,000 is not fully offset by a base salary that is
low by only S25.000. In determining the magnitude
of compensation elements, the timing of receipt by
the employee must be considered. For example, a
bonus of S 100,000 in the current period will be con-
sidered as of greater value than a deferred compen-
sation arrangement to make the same payment in
some future period.
(2) Compensation costs under certain conditions,
give rise to the need for special consideration. Among
such conditions are the following:	" ."
(i) Compensation to (A) owners of closely held
corporations, partners, sole proprietors, or members
of their immediate families, or (B) persons who are
contractually committed to acquire a substantial
financial interest in the contractor's enterprise.
Determination should be made that salaries are
reasonable for the personal services rendered rather
than being a distribution of profits. Compensation
in lieu of salary for services rendered by partners and
sole proprietors will be allowed to the extent that it is
reasonable and does not constitute a distribution of
profits. For closely held corporations, compensation
costs covered by this subdivision shall not be
recognized in amounts exceeding those costs that are
deductible as compensation under the Internal
Revenue Code and regulations under it.
(if) Any change in a contractor's compensation
policy that results in a substantial increase in the
contractor's level of compensation, particularly
when it was concurrent with an increase in the ratio
of Government contracts to other business, or any
change in the treatment of allowability of specific
types of compensation due to changes in Govern-
ment policy. Contracting officers or their represen-
tatives should normally challenge increased costs
where major revisions of existing compensation
plans or new plans are introduced by the contractor,
and the contractor —
(A)	Has not notified the cognizant ACO of the
changes either before their implementation or
within a reasonable period after their implementa-
tion; and
(B)	Has not provided the Government, either
before implementation or within a reasonablt
31-13
-------
FAC 84-15	APRIL 7,1986
31,20S-<	FEDERAL ACQUISITION REGULATION (PAR)
period after it. an opportunity to review the rea-
sonableness of the changes.
(iii)	The contractor's business is such that its com-
pensation levels are not subject to the restraints that
normally occur in the conduct of competitive
business.
(iv)	The contractor incurs costs for compensation
in excess of the amounts which are deductible under
the Internal Revenue Code and regulations issued
under it.
(c) Labor-management agreements. Nothwithstanding
any other requirements of this subsection 31.205-6,
costs of compensation are not allowable to the extent
that they result from provisions of labor-management
agreements that, as applied to work in performing
Government contracts, are determined to be unreason-
able because they are either unwarranted by the char-
acter and circumstances of the work or discriminatory
against the Government. The application of the provi-
sions of a labor-management agreement designed to
apply to a given set of circumstances and condition* of
employment (e.g., work involving extremely hazardous
activities or work not requiring recurrent use of over-
time) is unwarranted when applied to a Government
contract involving significantly different circumstances
and conditions of employment (e.g., work involving
ktess hazardous activities or work continually requiring
¦e of overtime). It is discriminatory against the Gov-
ernment if it results in employee compensation (in
whatever form or name) in excess of that being paid
for similar non-Government work under comparable
circumstances. Disallowance of costs will not be made
under this paragraph (c) unless—
(1)	The contractor has been permitted an opportu-
nity to justify the costs; and
(2)	Due consideration has been given to whether
unusual conditions pertain to Government contract
work, imposing burdens, hardships, or hazards on the
contractor's employees, for which compensation that
might otherwise appear unreasonable is required to
attract and hold necessary personnel.
(d)	Salaries and wages. Salaries and wages for current
services include gross compensation paid to employees
in the form of cash, stock (see subparagraph (f)(2)
below regarding valuation), products, or services, and
are allowable.
(e)	Domestic and foreign differential pay. (I) When
personal services are performed in a foreign country,
compensation may also include a differential tnat may
properly consider all expenses associated with foreign
employment such as housing, cost of living adjust-
ments. transportation, bonuses, additional Federal,
^taie. local or foreign income taxes resulting from for-
;n assignment, and other related expenses.
(2) Although the additional taxes in subparagraph
(1) above may be considered in establishing foreign
overseas differential, any increased compensation cal-
culated directly on the basis of an employee's specif-
ic increase in income taxes is unallowable. Differen-
tial allowances for additional Federal. Sate, or local
income taxes resulting from domestic assignments are
unallowable.
(0 Bonuses and incentive compensation. (1) Incentive
compensation for management employees, cash bo-
nuses, suggestion awards, safety awards, and incentive
compensation based on production, cost reduction, or
efficient performance are allowable provided the
awards are paid or accrued under an agreement entered
into in good faith between the contractor and the em-
ployees before the services are rendered or pursuant to
an established plan or policy followed by the contrac-
tor so consistently as to imply, in effect, an agreement
to make such payment and the basis for the award is
supported.
(2)	When the costs of bonuses and incentive com-
pensation are paid in the stock of the contractor or .
of aik affiliate, the following additional restrictions
apply:
(!) Valuation placed on the stock shall be the fair
market value on the measurement date (i.e^ the
first date the number of shares awarded is known)
determined upon the most objective basis availa-
ble; and
(ii) Accruals for the cost of stock before issuing
the stock to the employees shall be subject to
adjustment according to the possibilities that the
employees will not receive the stock and that their
interest in the accruals wfll be forfeited.
(3)	When the bonus and incentive compensation
payments are deferred, the costs are subject to the
requirements of subparagraph (0(1) above and of
paragraph (k) below.
(g) Severance pay. (1) Severance pay, also commonly
referred to as dismissal wages, is a payment in addition
to regular salaries and wages by contractors to workers
whose employment is being involuntarily terminated.
Payments for early retirement incentive plans are cov-
ered in subparagraph (j)(6) below.
(2) Severance pay to be allowable must meet the
general allowability criteria in subdivision (gX2Xi)
below, and. depending upon whether the severance
is normal or abnormal, criteria in subdivision
(gX2X*u) for normal' severance pay or subdivision
(gX2Xiii) for abnormal severance pay also apply.
(i) Severance pay is allowable only to the extent
that, in each case, it is required by (A) law, (B)
employer-employee agreement, (Q established
policy that constitutes, in effect, an implied agree-
ment on the contractor's part, or (D) circum-
stances of the particular employment Payments
made in the event of employment with a replace-
ment contractor where continuity of employment
with credit for prior length of service is preserved
under substantially equal conditions of employ-
31-14
-------
JtAL.84-.it> JULI3U, W87
PART 31—CONTRACT COST ..PRINCIPLES AND PROCEDURES
31.205-6
ment, or continued employment by the contractor
at another facility, subsidiary, affiliate, or parent
company of the contractor are not severance pay
and are unallowable. Severance payments, or
amounts paid in lieu thereof, are not allowable
when paid to employees in addition to early or
normal retirement payments.
(ii)	Actual normal turnover severance payments
shall be allocated to all work performed in the
contractor's plant, or where the contractor pro-
vides for accrual of pay for normal severances,
that method will be acceptable if the amount of
the accrual is reasonable in light of payments actu-
ally made for normal severances over a representa-
tive past period and if amounts accrued are allo-
cated to all work performed in the contractor's
plant.
(iii)	Abnormal or mass severance pay is of such
a conjectural nature that measurement of costs by
means of an accrual will not achieve equity to
both parties. Thus, accruals for this purpose are
not allowable.' However, the Government recog-
nizes its obligation to participate, to the extent of
its fair share, in any specific payment Thus,
allowability will be considered on a case-by-case
basis.
(h) Backpay. (1) Backpay resulting from violations of
Federal labor laws or the Civil Rights Act of 1964. Back-
pay may result from a negotiated settlement, order, or
court decree that resolves a violation of Federal labor
laws or the Civil Rights Act of 1964. Such backpay
falls into two categories: one requiring the contractor
to pay employees additional compensation for work
performed for which they were underpaid, and the
other resulting from other violations, such as when the
employee was improperly discharged, discriminated
against, or other circumstances for which the backpay
was not additional compensation for work performed.
Backpay resulting from underpaid work is compensa-
tion for the work performed and is allowable. All other
backpay resulting from violation of Federal labor laws
or the Civil Rights Act of 1964 is unallowable.
(2) Other backpay. Backpay may also result from
payments to union employees (union and non-union)
for the difference in their past and current wage
rates for working without a contract or labor agree-
ment during labor management negotiations. Such
backpay is allowable. Backpay to nonunion employ-
ees based upon results of union agreement negotia-
tions is allowable only if (i) a formal agreement or
understanding exists between management and the
employees concerning these payments, or (ii) an es-
tablished policy or practice exists and is followed by
the contractor so consistently as to imply, in effect,
an agreement to make such payment.
(i) Stock options, stock appreciation rights, phai
stock plans, and junior stock conversions.
(1)	The cost of stock options awarded to employees
to purchase stock of the contractor or of an affiliate
will be treated as deferred compensation and must
comply with the requirements of paragraph (k) of this
subsection. The allowable cost of stock options is lim-
ited to the difference between the option price and the
market price on the first date on which the option price
and the number of shares are known. Accordingly,
when the stock option price is equal to or greater than
the market price on that date, then no costs are allow-
able for contract costing purposes.
(2)	Stock appreciation rights are rights granted to
employees by contractors to receive the increase in
value, or appreciation, of company stock even though
the employee neither purchases the stock nor receives
title to it. Stock appreciation rights will be treated as
deferred compensation and must comply with the re-
quirements of paragraph (k) of this subsection. The al-
lowable cost of stock appreciation rights is limited to
the difference between the stock-appreciation-right
base price from which appreciation will be measured
and the market price on the first date on which bo*1-
the number of shares and the stock-appreciation-r
base price are known. Accordingly, when the stock
preciation-right base price is equal to or greater than
the market price on that date, then no costs are allow-
able for contract costing purposes.
(3)	In phantom-stock-type plans, contractors as-
sign or attribute contingent shares of stock to employ-
ees as if the employees own the stock, even though the
employees neither purchase the stock nor receive title
to it. Under these plans, an employee's account may be
increased by the equivalent of dividends paid and any
appreciation in the market price of the stock over the
price of the stock on the first date on which the number
of shares awarded is known. Such increases in employ-
ee accounts for dividend equivalents and market price
appreciation are unallowable.
(4)	Junior stock is a class of equity stock that (i) is
sold to employees at a price below that of the contrac-
tor's common stock, (ii) carries reduced dividend vot-
ing rights, and (iii) is convertible to common stock
upon the attainment of specified corporate goals.
Costs associated with the conversion of junior stock
into common stock are not allowable, whether or not
they are accounted for as compensation costs.
(The next page is 31-15.)
31-14.1
-------
PART 31—CONTRACT COST PRINCIPLES AND PROCEDURES
31.205-6 	
(j) Pension costs. (1) A pension plan is a deferred
compensation plan that is established and maintained by
one or more employers to provide systematically for
ying benefits to plan participants after their retire-
int, provided that the benefits are paid for life or are
payable for life at the option of the employee. Addi-
tional benefits such as permanent and total disability
and death payments and survivorship payments to
beneficiaries of deceased employees may be treated as
pension costs, provided the benefits are an integral part
of the pension plan and meet all the criteria pertaining
to pension costs.
(2)	Pension plans are normally segregated into two
types of plans: defined benefit or defined contribu-
tion pension plans. The cost of all defined benefit
pension plans shall be measured, allocated, and ac-
counted for in compliance with the provisions of
CAS 412, Composition and Measurement of Pension
. Costs, and CAS 413, Adjustment and Allocation of
Pension Cost. The costs of all defined contribution
pension plans shall be measured, allocated, and ac-
counted for in accordance with the provisions of
CAS 412. Pension costs are allowable subject to the
referenced standards and the cost limitations and ex-
clusions set forth below in this subparagraph and in
subparagraphs (j)(3), (4), (5), (6), and (7) below.
(i)	To be allowable in the current year, pension-
costs must be funded by the time set for filing the
Federal income tax return or any extension there-
of. Pension costs assigned to the current year, but
not funded by the tax return time, shall not be
allowable in any subsequent year.
(ii)	Pension payments must be reasonable in
amount and be paid pursuant to (A) an agreement
entered into in good faith between the contractor
and employees before the work or services are
performed and (B) the terms and conditions of the
established plan. The cost of changes in pension
plans which are discriminatory to the Government
or are not intended to be applied consistently for
all employees under similar circumstances in the
future are not allowable.
(iii)	Except as provided for early retirement
benefits in subparagraph (j)(6) below, one-time-
only pension supplements not available to all par-
ticipants of the basic plan are not allowable as
pension costs unless the supplemental benefits rep-
resent a separate pension plan and the benefits are
payable for life at the option of the employee.
(iv)	Increases in payments to previously retired
plan participants covering cost-of-living adjust-
ments are allowable if paid in accordance with a
policy or practice consistently followed.
(3)	Defined benefit pension plans. This subparagraph
covers pension plans in which the benefits to be paid
or the basis for determining such benefits are estab-
lished in advance and the contributions are intended
to provide the stated benefits. The cost limitations
and exclusions pertaining to defined benefit plans are
as follows:
(i)	Normal costs of pension plans not funded in
the year incurred, and all other components of
pension costs (see CAS 412.40(a)(1)) assignable to
the current accounting period but not funded
during it, shall not be allowable in subsequent
years (except that a payment made to a fund by
the time set for filing the Federal income tax
return or any extension thereof is considered to
have been made during such taxable year). How-
ever, any part of a pension cost that is computed
for a cost accounting period that is deferred pursu-
ant to a waiver granted under the provisions of the
Employee's Retirement Income Security Act of
1974 (ERISA) (see CAS 412.50(c)(3)), will be al-
lowable in those future accounting periods in
which the funding does occur. The allowability of
these deferred contributions will be limited to the
amounts that would have been allowed had the
funding occurred in the year the costs would have
been assigned except for the waiver.
(ii)	Any amount paid or funded before the time
it becomes assignable and allowable shall be ap-
plied to future years, in order of time, as if actually
paid and deductible in those years. The interest
earned on such premature funding, based on the
valuation rate of return, may be excluded from
future years' computations of pension costs in ac-
cordance with CAS 412.50(a)(7).
(iii)	Increased pension costs caused by delay in
funding beyond 30 days after each quarter of the
year to which they are assignable are unallowable.
If a composite rate is used for allocating pension
costs between the segments of a company and if,
because of differences in the timing of the funding
by the segments, an inequity exists, allowable pen-
sion costs for each segment will be limited to that
particular segment's calculation of pension costs as
provided for in CAS 413.50(c)(5). Determination
of unallowable costs shall be made in accordance
with the actuarial method used in calculating pen-
sion costs.
(iv)	Allowability of the cost of indemnifying the
Pension Benefit Guaranty Corporation (PBGC)
under ERISA Section 4062 or 4064 arising from
terminating an employee deferred compensation
plan will be considered on a case-by-case basis;
provided that if insurance was required by the
PBGC under ERISA Section 4023, it was so ob-
tained and the indemnification payment is not re-
coverable under the insurance. Consideration
under the foregoing circumstances will be primar-
ily for the purpose of appraising the extent to
which the indemnification payment is allocable to
31-15
-------
31.205-6
FEDERAL ACQUISITION REGULATION (FAR)
Government work. If a beneficial or other equita-
ble relationship exists, the Government will par-
ticipate, despite the requirements of 31.205-19(a)(3)
and (b), in the indemnification payment to the
extent of its fair share.
(4)	Defined contribution pension plans. This subpara-
graph covers those pension plans in which the con-
tributions to be made are established in advance and
the level of benefits is determined by the contribu-
tions made. It also covers profit sharing, savings
plans, and other such plans provided the plans fall
within the definition of a pension plan in subpara-
graph (j)0) above.
(i)	The pension cost assignable to a cost ac-
counting period is the net contribution required to
be made for that period after taking into account
dividends and other credits, where applicable.
However, any portion of pension cost computed
for a cost accounting period that is deferred pursu-
ant to a waiver granted under the provisions of
ERISA (see CAS 412.50(c)(3)) will be allowable in
those future accounting periods when the funding
does occur. The allowability of these deferred con-
tributions will be limited to the amounts that
would have been allowed had the funding been
made in the year the costs would have been as-
signed except for the waiver.
(ii)	Any amount paid or funded to the trust
before the time it becomes assignable and allow-
able shall be applied to future years, in order of
time, as if actually paid and deductible in such
years.
(iii)	The provisions of subdivision (j)(3)(iv)
above concerning payments to PBGC apply to
defined contribution plans.
(5)	Pension plans using pay-as-you-go methods. A
pension plan using pay-as-you-go methods is a plan
in which the contractor recognizes pension cost only
when benefits are paid to retired employees or their
beneficiaries. Regardless of whether the payment of
pension benefits contribution can or cannot be com-
pelled, allowable costs for these types of plans shall
not exceed an amount computed as follows:
(i)	Compute, by using' an actuarial cost method,
the plan's actuarial liability for benefits earned by
plan participants. This entire liability is always un-
funded for a pay-as-you-go plan.
(ii)	Compute a level amount which, including an
interest equivalent, would amortize the unfunded
actuarial liability over a period of no less than 10
or more than 40 years "from the inception of the
liability.
(iii)	Compute, by using an actuarial cost method,
a normal cost for the period.
(iv)	The sum of (ii) "and (iii) above represents the
amount of pension costs assignable to the current
period. This amount, however, is limited to the
amount paid in the year.
(v)	For purposes of determining contract cost
where a pay-as-you-go plan is initiated as either a
supplemental plan or an additional but separate
plan to a basio funded plan, the plans will be
treated as one plan; e.g., the actuarial cost method,
past service amortization period, etc., of the basic
plan will be used on the supplemental or additional
pay-as-you-go plan in determining the proper costs
assignable to the current period. Any costs in
excess of those determined by using the actuarial
cost method and assumptions of the basic plan are
unallowable. However, where assumption for
salary progressions, mortality rates of the partici-
pants, and so forth are significantly different, the
assumptions used for the basic and supplemental
plan may be different.
(vi)	The requirements of subdivisions G)(3)(i)
through (iv) above are also applicable to pay-as-
you-go plans.
(6) Early retirement incentive plans. An early retire-
ment incentive plan is a plan under which employees
receive a bonus or incentive, over and above the
requirement of the basic pension plan, to retire early.
These plans normally are not applicable to all partici-
pants of the basic plan and do not represent life
income settlements, and as such would not qualify as
pension costs. However, for contract costing pur-
poses, early retirement incentive payments are allow-
31-16
-------
FAC 84-15	APRIL 7,1986
PART 31—CONTRACT COST PRINCIPLES AND PROCEDURES
able subject to the pension cost criteria contained in
subdivisions (j)(3)(i) through (iv) provided—
(i)	The costs are accounted for and allocated in
accordance with the contractor's system of ac-
counting for pension costs (see subdivision (jX5)(v)
above for supplemental pension benefits);
(ii)	The payments are made in accordance with
the terms and conditions of the contractor's plan;
(iii)	The plan is applied only to active employ-
ees. The cost of extending the plan to employees
who retired or were terminated before the adop-
tion of the plan is unallowable; and
(iv)	The total of the incentive payments to any
employee may not exceed the amount of the em-
ployee's annual salary for the previous fiscal year
before the employee's retirement.
(7) Employee stock ownership plans (ESOP) (i) An
ESOP is an individual stock bonus plan designed
specifically to invest in the stock of the employer
corporation. The contractor's contributions to an
Employee Stock Ownership Trust (ESOT) may be in
the form of cash, stock, or property. Costs of
ESOP's are allowable subject to the following condi-
tions:
(A)	Contributions by the contractor in any
one year may not exceed IS percent (25 percent
when a money purchase plan is included) of
salaries and wages of employees participating in
the plan in any particular year.
(B)	The contribution rate (ratio of contribu-
tion to salaries and wages of participating em-
ployees) may not exceed the last approved con-
tribution rate except when approved by the con-
tracting ofTicer based upon justification provided
by the contractor. When no contribution was
made in the previous year for an existing ESOP,
or when a new ESOP is first established, and
the contractor proposes to make a contribution
in the current year, the contribution rate shall be
subject to the contracting officer's approval.
(C)	When a plan or agreement exists wherein
the liability for the contribution can be com-
pelled for a specific year, the expense associated
with that liability is assignable only to that
period. Any portion of the contribution not
funded by the time set for filing of the Federal
income tax return for that year or any extension
thereof shall not be allowable in subsequent
years.
(D)	When a plan or agreement exists wherein
the liability for the contribution cannot be com-
pelled, the amount contributed for any year is
assignable to that year provided the amount is
funded by the time set for filing of the Federal
income tax return for that year.
(E)	When the contribution is in the form of
stock, the value of the stock contribution shall
be limited to the fair market value of the stock
on the date that title is effectively transferred to
31.205-6
the trust. Cash contributions shall be allowable
only when the contractor furnishes evidence sat-
isfactory to the contracting officer demonstrat-
ing that stock purchases by the ESOT are or
will be at a fair market price; e.g., makes ar-
rangements with the trust permitting the con-
tracting officer to examine purchases of stock by
the trust to determine that prices paid are at fair
market value. When, excessive prices are paid,
the amount of the excess will be credited to the
same indirect ;ost pools that were charged for
the ESOP contributions in the year in which the
stock purchase occurs. However, when the trust
purchases the stock -with borrowed funds which
will be repaid over a period of years by cash
contributions from the contractor to the trust,
the excess price over fair market value shall be
credited to the indirect cost pools pro rata over
the period of years during which the contractor
contributes the cash used by the trust to repay
the loan. When the fair market value of unissued
stock or stock of a closely held corporation is
not readily determinable, the valuation will be
made on a case-by-case basis taking into consid-
eration the guidelines for valuation used by the
IRS.
(ii)	Amounts contributed to an ESOP arising
from either (A) an additional investment tax credit
(see 1975 Tax Reduction Act—TRASOP's); or (B)
a payroll-based tax credit (see Economic Recovery
Tax Act of 1981) are unallowable.
(iii)	The requirements of subdivision (jX3)(ii)
above are applicable to Employee Stock Owner-
ship Plans.
(k) Deferred compensation. (I) Deferred compensa-
tion is an award given by an employer to compensate
an employee in a future cost accounting period or
periods for services rendered in one or more cost ac-
counting periods before the date of receipt of compen-
sation by the employee. Deferred compensation does
not include the amount of year-end accruals for sala-
ries, wages, or bonuses that are paid within a reason-
able period of time after the end of a cost accounting
period. Subject to 31.205-6(a), deferred awards are al-
lowable when they are based on current or future serv-
ices. Awards made in periods subsequent to the period
when the work being remunerated was performed are
not allowable.
(2)	The costs of deferred awards shall be meas-
ured, allocated, and accounted for in compliance
with the provisions of CAS 415, Accounting for the
Cost of Deferred Compensation.
(3)	Deferred compensation payments to employees
under awards made -before the effective date of CAS
415 are allowable to the extent they would have
been allowable under prior acquisition regulations.
(1) Reserved.
(m) Fringe benefits. (1) Fringe benefits are allowances |
31-17
-------
FAC 84-21 AUGUST 29, 1986
	FEDERAL ACQUISITION REGULATION (FAR)
31.205-7
and services provided by the contractor to its employees
as compensation in addition to regular wages and
salaries. Fringe benefits include, but are not limited to.
the cost of vacations, sick leave, holidays, military leave,
employee insurance, and supplemental unemployment
benefit plans. Except as provided elsewhere in Subpart
31.2, the costs of fringe benefits are allowable to the ex-
tent that they are reasonable and are required by law,
employer-employee agreement, or an established policy
of the contractor.
(2) That portion of the cost of company-furnished
automobiles that relates to personal use by employees
(including transportation to and from work) is
unallowable regardless of whether the cost is reported
as taxable income to the employees (see 31.205-46(0).
(n) Employee rebate and purchase discount plans. Re-
bates and purchase discounts, in whatever form, granted
to employees on products or services produced by the
contractor or affiliates are unallowable.
31.205-7 Contingencies.
(a)	"Contingency." as used in this subpart, means a
possible future event or condition arising from present-
ly known or unknown causes, the outcome of which is
indeterminable ai the present time.
(b)	Costs for contingencies are generally unallowable
for historical costing purposes because such costing
deals with costs incurred and recorded on the contrac-
tor's books. However, in some cases, as for example,
terminations, a contingency factor may be recognized
when it is applicable to a past period to give recogni-
tion to minor unsettled factors in the interest of expe-
diting settlement.
(c)	In connection with estimates of future costs, con-
tingencies fall into two categories:
(1)	Those that may anse from presently known
and existing conditions, the effects of which are fore-
seeable within reasonable limits of accuracy; e.g..
anticipated costs of rejects and defective work. Con-
tingencies of this category are to be included in the
estimates of future costs so as to provide the best
estimate of performance cost.
(2)	Those that may arise from presently known or
unknown conditions, the effect of which cannot be
measured so precisely as to provide equitable results
to the contractor and to the Government; e.g.. re-
sults of pending litigation. Contingencies of this cate-
gory are to be excluded from cost estimates under
the several items of cost, but should be disclosed
separately (including the basis upon which the con-
tingency is computed) to facilitate the negotiation of
appropriate contractual coverage. (See, for example.
31.205-6(g). 31.205-19. and 31.205-24.)
31.205-8 Contributions or donations.
Contributions or donations, including cash, property
and services, regardless of recipient, are unallowable, ex-
cept as provided in 31.205- 1(e)(3).
31.205-9 Reserved.
31.205-10 Cost of money.
(a)	Facilities capital cost of money.
(1)	General (i) Facilities capital cost of money (cost
of capital committed to facilities) is an imputed cost
determined by applying a cost-of-money rate to facil-
ities capital employed in contract performance. A
cost-of-money rate is uniformly imputed to all con-
tractors (see subdivision (ii) below). Capital em-
ployed is determined without regard to whether its
source is equity or borrowed capital. The resulting
cost of money is not a form of interest on borrow-
ings (see 31.205-20).
(ii) CAS 414. Cost of Money as an Element of
the Cost of Facilities Capital, establishes criteria
for measuring and allocating, as an element of con-
tract cost, the cost of capital committed to facili-
ties. Cost-of-money factors are developed on Form
CASB-CMF, broken down by overhead pool at
the business unit, using (A) business-unit facilities
capital data. (B) overhead allocation base data, and
(C) the cost-of-money rate, which is based on in-
terest rates specified by the Secretary of the Treas-
ury under 50 U.S.C. App. 1215(b)(2).
(2)	Allowability. Whether or not the contract is
otherwise subject to CAS. facilities capital cost of
money is allowable if—
(i)	The contractor's capital investment is meas-
ured. allocated to contracts, and costed in accord-
ance with CAS 414;
(ii)	The contractor maintains adequate records to
demonstrate compliance with this standard; and
(iii)	The estimated facilities capital cost of
money is specifically identified or proposed in cost
proposals relating to the contract under which this
cost is to be claimed.
(3)	Accounting. The facilities capital cost of money
need -not be entered on the contractor's books of
account. However, the contractor shall (i) make a
memorandum entry of the cost and (ii) maintain, in a
manner that permits audit and verification, all rele-
vant schedules, cost data, and other data necessary to
support the entry fully.
(4)	Payment. Facilities capital cost of money that is
(i) allowable under subparagraph (2) above and (ii)
calculated, allocated, and documented in accordance
with this cost principle shall be an "incurred cost"
for reimbursement purposes under applicable cost-
reimbursement contracts and for progress payment
purposes under fixed-price contracts.
(5)	The cost of money resulting from including goodwill
(however represented) in the facilities capital employed
base is unallowable.
(b)	Cost of money as an element of the cost of capital
assets under construction.
(I) General (i) Cost of money as an element of the
31-18
-------
PART 31—CONTRACT COST PRINCIPLES AND PROCEDURES
31.205-10
cost of capital assets under construction is an imput-
ed cost determined by applying a cost-of-money rate
to the investment in tangible and intangible capital
assets while they are being constructed, fabricated,
or developed for a contractor's own use. Capital
employed is determined without regard to whether
its source is equity or borrowed capital. The result-
ing cost of money is not a form of interest on bor-
rowing (see 31.203-20).
(ii) CAS 417. Cost of Money as an Element of
the Cost of Capital Assets Under Construction,
establishes criteria for measunng and allocating, as
an element of contract cost, the cost of capital
(The next page :s 31-19.)
3i-!8.1
-------
FAC 84-15	APRIL 7,1986
PART 31—CONTRACT COST PRINCIPLES AND PROCEDURES
31.205-11
committed to capital assets under construction,
fabrication, or development.
(2)	Allowability (i) Whether or not the contract is
otherwise subject to CAS, and except as specified in
subdivision (ii) below, the cost of money for capital
assets under construction, fabrication, or develop-
ment is allowable if—
(A)	The cost of money is calculated, allocated
to contracts, and cos ted in accordance with
CAS 417;
(B)	The contractor maintains adequate records
to demonstrate compliance with this standard;
and
(C)	The cost of money for tangible capital
assets is included in the capitalized cost that
provides the basis for allowable depreciation
costs, or, in the case of intangible capital assets,
the cost of money is included in the cost of
those assets for which amortization costs are al-
lowable.
(ii) Actual interest cost in lieu of the calculated
imputed cost of money for capital assets under
construction, fabrication, or development is un-
allowable.
(3)	Accounting. The cost of money for capital
assets under construction need not be entered on the
contractor's books of account However, the con-
tractor shall (i) make a memorandum entry of the
cost and (ii) maintain, in a manner that permits audit
and verification, all relevant schedules, cost data, and
other data necessary to support the entry fully.
(4)	Payment. The cost of money for capital assets
under construction that is allowable under subpara-
graph (2) above of this cost principle shall be an
"incurred cost" for reimbursement purposes under
applicable cost-reimbursement contracts and for
progress payment purposes under fixed-price con-
tracts.
31.205-11 Depreciation.
(a)	Depreciation is a charge to current operations
which distributes the cost of a tangible capital asset,
less estimated residual value, over the estimated useful
life of the asset in a systematic and logical manner. It
does not involve a process of valuation. Useful life
refers to the prospective period of economic usefulness
in a particular contractor's operations as distinguished
from physical life; it is evidenced by the actual or
estimated retirement and replacement practice of the
contractor.
(b)	Contractors having contracts subject to CAS 409,
Depreciation of Tangible Capital Assets, must adhere
to the requirement of that standard for all fully CAS-
covered contracts and may elect to adopt the standard
for all other contracts. All requirements of CAS 409
are applicable if the election is made, and its require-
ments supersede any conflicting requirements of this
cost principle. Once electing to adopt CAS 409 for all
contracts, contractors must continue to follow it until
notification of final acceptance of all deliverable items
on all open negotiated Government contracts. Para
graphs (c) through (e) below apply to contracts tc
which CAS 409 is not applied.
(c)	Normal depreciation on a contractor's plant,
equipment, and other capital facilities is an allowable
contract cost, if the contractor is able to demonstrate
that it is reasonable and allocable (but see paragraph 0) I
below).
(d)	Depreciation shall be considered reasonable if the
contractor follows policies and procedures that are—
(1)	Consistent with those followed in the same cost
center for business other than Government;
(2)	Reflected in the contractor's books of accounts
and financial statements; and
(3)	Both used and acceptable for Federal income
tax purposes.
(e)	When the depreciation reflected on a contractor's
books of accounts and financial statements differs from
that used and acceptable for Federal income tax pur-
poses, reimbursement shall be based on the asset cost
amortized over the estimated useful life of the property
using depreciation methods (straight line, sum of the
years' digits, etc.) acceptable for income tax purposes.
Allowable depreciation shall not exceed the amounts
used for* book and statement purposes and shall be
determined in a manner consistent with the depreci
ation policies and procedures followed in the same cos,
center on non-Government business.
(0 Depreciation for reimbursement purposes in the
case of tax-exempt organizations shall be determined on
the basis described in paragraph (e) immediately above.
(g)	Special considerations are required for assets ac-
quired before the effective date of this cost principle if,
on that date, the undepreciated balance of these assets
resulting from depreciation policies and procedures
used previously for Government contracts and subcon-
tracts is different from the undepreciated balance on
the books and financial statements. The undepreciated
balance for contract cost purposes shall be depreciated
over the remaining life using the methods and lives
followed for book purposes. The aggregate depreci-
ation of any asset allowable after the effective date of
this 31.205-11 shall not exceed the cost basis of the
asset less any depreciation allowed or allowable under
prior acquisition regulations.
(h)	Depreciation should usually be allocated to the
contract and other work as an indirect cost. The
amount of depreciation allowed in any accounting
period may, consistent with the basic objectives in
paragraph (a) above, vary with volume of production
or use of multishift operations.
(i)	In the case of emergency facilities covered
certificates of necessity, a contractor may elect to
normal depreciation without requesting a determination
of "true depreciation," or may elect to use either
31-19
-------
31.205-12
FEDERAL ACQUISmON REGULATION (FAR)
normal or "true depreciation" after a determination of
depreciation" has been made by an Emergency
^^Bies Depreciation Board (EFDB). The method
CTrod must be followed consistently thoughout the
life of the emergency facility. When an election is
made to use normal depreciation, the criteria in para-
graphs (c), (d), (e), and (f) above shall apply for both
the emergency period and the post-emergency period.
When an election is made to use "true depreciation",
the amount allowable as depreciation—
(1)	With respect to the emergency period (five
years), shall be computed in accordance with the
determination of the EFDB and allocated ratsably
over the full five year emergency period; provided no
other allowance is made which would duplicate the
factors, such as extraordinary obsolescence, covered
by the Board's determination; and
(2)	After the end of the emergency period, shall be
computed by distributing the remaining undepreciat-
ed portion of the cost of the emergency facility over
the balance of its useful life provided' the remaining
undepreciated portion of such cost shall not include
any amount of unrecovered "true depreciation."
(j) No depreciation, rental, or use charge shall be
allowed on property acquired at no cost from the Gov-
ernment by the contractor or by any division, subsidi-
a^. or affiliate of the contractor under common con-
The depreciation on any item which meets the
criteria for allowance at a "price" under 31.205-26(e)'
may be based on that price, provided the same policies
and procedures are used for costing all business of the
using division, subsidiary, or organization under
common control.
0) No depreciation or rental shall be allowed on
property fully depreciated by the contractor or by any
division, subsidiary, or affiliate of the contractor under
common control. However, a reasonable charge for
using fully depreciated property may be agreed upon
and allowed (but see 31.109(hX2)). In determining the
charge, consideration shall be given to cost, total esti-
mated useful life at the time of negotiations, efTect of
any increased maintenance charges or decreased effi-
ciency due to age, and the amount of depreciation
previously charged to Government contracts or sub-
contracts.
(m) CAS 404, Capitalization of Tangible Assets, ap-
plies to assets acquired by a "capital lease" as defined
in Statement of Financial Accounting Standard No. 13
(FAS-13), Accounting for Leases, issued by the Finan-
cial Accounting Standards Board (FASB). Compliance
with CAS 404 and FAS-13 requires that such leased
(capital leases) be treated as purchased assets; Le.,
italized and the capitalized value of such assets
tributed over their useful lives as depreciation
charges, or over the leased life as amortization charges
as appropriate. Assets whose leases are classified as
capital leases under FAS-13 are subject to the require-
ments of 31.205-11 while assets acquired under leases
classified as operating leases are subject to the require-
ments on rental costs in 31.203-36. The standards of
financial accounting and reporting prescribed by FAS-
13 are incorporated into this principle and shall govern
its application, except as provided in subparagraphs (1),
(2), and (3) below.
(1)	Rental costs under a sale and leaseback ar-
rangement shall be allowable up to the amount that
would have been allowed had the contractor re-
tained title to the property.
(2)	Capital leases, as defined in FAS-13, for all real
and personal property, between any related parties
are subject to the requirements of this subparagraph
31.20S-1 l(m). If it is determined that the terms of the
lease have been significantly affected by the fact that
the lessee and lessor are related, depreciation charges
shall not be allowed in excess of those which would
have occurred if the lease contained terms consistent
with those found in a lease between unrelated par-
ties.
(3)	Assets acquired under leases that the contractor
must capitalize under FAS-13 shall not be treated as
purchased assets for contract purposes if the leases
are covered by 31.205-36(bX4).
31.205-12 Economic planning costs.
(a)	This category includes costs of generalized long-
range management planning that is concerned with the
future overall development of the contractor's business
and that may take into account the eventual possibility
of economic dislocations or fundamental alterations in
those markets in which the contractor currently does
business. Economic planning costs do not include orga-
nization or reorganization costs covered by 31.205-27.
(b)	Economic planning costs are allowable as indirect
costs to be properly allocated.
(c)	Research and development and engineering costs
designed to lead to new products for sale to the gener-
al public are not allowable under this principle.
31.205-13 Employee morale, health, welfare, food serv-
ice, and dormitory costs and credits.
(a)	Aggregate costs incurred on activities designed to
improve working conditions, employer-employee rela-
tions, employee morale, and employee performance
Oess income generated by these activities) are allow-
able, except as limited by paragraph (b) immediately
below, and to the extent that the net amount is reason-
able. Some examples are house publications, health
clinics, recreation, employee counseling services, and
food and dormitory services, which include operating
or furnishing facilities for cafeterias, dining rooms, can-
teens, lunch wagons, vending machines, living accom-
modations, or similar types of services for the contrac-
tor's employees at or near the contractor's facilities.
(b)	Losses from operating food and dormitory serv-
ices may be included as costs only if the contractor's
objective is to operate such services on a break-even
31*20
-------
FAC 84-15	APRIL 7,1986
PART 31—CONTRACT COST PRINCIPLES AND PROCEDURES
31.205-17
basis. Losses sustained because food services or lodging
accommodations are furnished without charge or at
prices or rates which obviously would not be conducive to
the accomplishment of the above objective are not allow-
able. A loss may be allowed, however, to the extent that
the contractor can demonstrate that unusual cir-
cumstances exist (e.g., (1) where the contractor must pro-
vide food or dormitory services at remote locations where
adequate commercial facilities are not reasonably
available, or (2) where charged but unproductive labor
costs would be excessive but for the services provided or
where cessation or reduction of food or dormitory
operations will not otherwise yield net cost savings) such
that even with efficient management, operating the ser-
vices on a break-even basis would require charging inor-
dinately high prices, or prices or rates higher than those
charged by commercial establishments offering the same
services in the same geographical areas. Costs of food
and dormitory services shall include an allocable share of
indirect expenses pertaining to these activities.
(c)	When the contractor has an arrangement authoriz-
ing an employee association to provide or operate a ser-
vice, such as vending machines in the contractor's plant,
and retain the profits. such profits shall be treated in the
same manner as if the contractor were providing the ser-
vice (but see paragraph (d) immediately below).
(d)	Contributions by the contractor to an employee or-
ganization, including funds from vending machine re-
ceipts or similar sources, may be included as costs incur-
red under paragraph (a) above only to the extent that the
contractor demonstrates that an equivalent amount of
the costs incurred by the employee organization would be
allowable if directly incurred by the contractor.
31.205-14 Entertainment costs.
Costs of amusement, diversion, social activities, and
any directly associated costs such as tickets to shows or
sports events, meals, lodging, rentals, transportation,
and gratuities are unallowable (but see 31.205-1 and
31.205-13). Costs of membership in social, dining, or
country clubs or other organizations having the same,
purposes are also unallowable, regardless of whether the
cost is reported as taxable income to the employees.
31.205-15 Fines and penalties.
Costs of fines and penalties resulting from violations
of, or failure of the contractor to comply with, Feder-
al, State, local, or foreign laws and regulations, are
unallowable except when incurred as a result of com-
pliance with specific terms and conditions of the contract
or written instructions from the contracting officer.
31.205-16 Gains and losses on disposition of deprecia-
ble property or other capital assets.
(a)	Gains and losses from the sale, retirement, or other
disposition (but see 31.205-19) of depreciable property
shall be included in the year in which they occur as credits
or charges to the cost grouping(s) in which the deprecia-
tion or amortization applicable to those assets was in-
cluded (but see paragraph (d) below).
(b)	Gains and losses on disposition of tangible capital
assets including those acquired under capital leases (see I
31.203-11 (m), shall be considered as adjustments of dr
preciation costs previously recognized. The gain or lo.
for each asset disposed of is the difference between the
net amount realized, including insurance proceeds from
involuntary conversions, and its undepreciated balance.
The gain recognized for contract costing purposes shall
be limited to the difference between the acquisition
cost (or for assets acquired under a capital lease, the
value at which the leased asset is capitalized) of the
asset and its undepreciated balance (except see subdivi-
sions (c)(2)(i) or (ii) below).
(c)	Special considerations apply to an involuntary
conversion which occurs when a contractor's property
is destroyed by events over which the owner has no
control, such as fire, windstorm, flood, accident, theft,
etc., and an insurance award is recovered. The follow-
ing govern involuntary conversions:
(1)	When there is a cash award and the converted
asset is not replaced, gain or loss shall be recognized
in the period of disposition. The gain recognized for
contract costing purposes shall be limited to the dif-
ference between the acquisition cost of the asset and
its undepreciated balance.
(2)	When the converted asset is replaced, the con-
tractor shall either—
(i)	Adjust the depreciable basis of the new assr
by the amount of the total realized gain or loss; o
(ii)	Recognize the gain or loss in the period of
disposition, in which case the Government shall
participate to the same extent as outlined in sub-
paragraph (c)(1) above.
(d)	Gains and losses on the disposition of depreciable
property shall not be recognized as a separate charge
or credit when—
(1)	Gains -and losses are processed through the
depreciation reserve account and reflected in the de-
preciation allowable under 31.205-11; or
(2)	The property is exchanged as part of the pur-
chase price of a similar item, and the gain or loss is
taken into consideration in the depreciation cost basis
of the new item.
(e)	Gains and losses arising from mass or extraordi-
nary sales, retirements, or other disposition shall be
considered on a case-by-case basis.
(0 Gains and losses of any nature arising from the sale
or exchange of capital assets other than depreciable pro-
perty shall be excluded in computing contract costs.
31.205-17 Idle facilities and idle capacity costs.
(a) "Costs of idle facilities or idle capacity," as used
in this subsection, means costs such as maintenanr
repair, housing, rent, and other related costs; e.g., pre
erty taxes, insurance, and depreciation.
"Facilities," as used in this subsection, means plant or
any portion thereof (including land integral to the op-
eration), equipment, individually or collectively, or any
31-21
-------
31.205-18
FEDERAL ACQUISmON REGULATION (FAR)
other tangible capital asset, wherever located, and
^^ether owned or leased by the contractor.
^^ftdle capacity," as used in this subsection, means the
^Hsed capacity of partially used facilities. It is the
difference between that which a facility could achieve
under 100 percent operating time on a one-shift basis,
less operating interruptions resulting from time lost for
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 multiple-shift basis may be used in the calcu-
lation instead of a one-shift basis if it can be shown that
this amount of usage could normally be expected for
the type of facility involved.
"Idle facilities," as used in this subsection, means
completely unused facilities that are excess to the con-
tractor's current needs.
(b)	The costs of idle facilities are unallowable unless
the facilities—
(1)	Are necessary to meet fluctuations in work-
load; or
(2)	Were necessary when acquired and are now
idle because of changes in requirements, production
economies, reorganization, termination, or other
causes which could not have been reasonably fore-
seen. (Costs of idle facilities are allowable for a rea-
^^fconable period, ordinarily not to exceed 1 year, de-
^^Knding upon the initiative taken to use, lease, or
^^oispose of the idle facilities (but see 31.205-42)).
(c)	Costs of idle capacity are costs of doing business
and are a factor in the normal fluctuations of usage or
overhead rates from period to period. Such costs are
allowable provided the capacity is necessary or was
originally reasonable and is not subject to reduction or
elimination by subletting, renting, or sale, in accord-
ance with sound business, economics, or security prac-
tices. Widespread idle capacity throughout an entire
plant or among a group of assets having substantially
the same function may be idle facilities.
(d)	Any costs to be paid directly by the Government
for idle facilities or idle capacity reserved for defense
mobilization production shall be the subject of a sepa-
rate agreement.
31.205-18 Independent research and development and
bid and proposal costs.
(a) Definitions.
"Applied research," as used in this subsection, means
that effort which (1) normally follows basic research,
but may not be severable from the related basic re-
search, (2) attempts to determine and exploit the poten-
•of scientific discoveries or improvements in tech-
fey, materials, processes, methods, devices, or tech-
es, -and (3) attempts to advance the state of the art.
Applied research does not include efforts whose princi-
pal aim is design, development, or test of specific items
or services to be considered for sale; these efforts are
within the definition of the term "development," de-
fined below.
"Basic research," as used in this subsection, ««
that research which is directed toward increase of
knowledge in science. The primary aim of basic re-
search is a fuller knowledge or understanding of the
subject under study, rather than any practical applica-
tion thereof.
"Bid and proposal (BAP) costs," as used* in this sub-
division, means the costs incurred in preparing, submit-
ting, and supporting bids and proposals (whether or not
solicited) on potential Government or non-Government
contracts. The term does not include the costs of effort
sponsored by a grant or cooperative agreement or re-
quired in contract performance.
"Company," as used in this subsection, means all
divisions, subsidiaries, and affiliates of the contractor
under common control.
"Development," as used in this subsection, means the
systematic use, under whatever name, of scientific and
technical knowledge in the design, development, test,
or evaluation of a potential new product or service (or
of an improvement in an existing product or service)
for the purpose of meeting specific performance re-
quirements or objectives. Development includes the
functions of design engineering, prototyping, and engi-
neering testing. Development excludes: (1) subcontract-
ed technical effort which is for the sole purpose of
developing an additional source for an existing product,
or (2) development effort for manufacturing or produc-
tion materials, systems, processes, methods, equipment,
tools, and techniques not intended for sale.
"Independent research and development (IR&D)"
means a contractor's IR&D cost that is not sponsored
by, or required in performance of, a contract or grant
and that consists of projects falling within the four
following areas: (1) basic research, (2) applied research,
(3) development, and (4) systems and other concept
formulation studies. IR&D effort shall not include tech-
nical effort expended in developing and preparing tech-
nical data specifically to support submitting a bid or
proposal.
"Systems and other concept formulation studies," as
used in this subsection, means analyses and study ef-
forts either related to specific IR&D efforts or directed
toward identifying desirable new systems, equipments
or components, or modifications and improvements to
existing systems, equipments, or components.
(b) Composition and allocation of costs. The require-
ments of CAS 420, Accounting for Independent Re-
search and Development Costs and Bid and Proposal
Costs, are incorporated in their entirety and shall apply
as follows—
(1) Fully-CAS-covered contracts. Contracts that an.
full y-CAS-covered shall be subject to all require-
ments of CAS 420.
31-22
-------
FAC 84-1 MARCH 26, 1984
PART 31—CONTRACT COST PRINCIPLES AND PROCEDURES
3L205-18
(2) Modified-CAS-covered and nor-CAS-covered con-
tracts. Contracts that are not CAS-covered or that
contain terms or conditions requiring modified CAS
coverage shall be subject to all requirements of CAS
420 except 4 CFR 420.50(e)(2) and 4 CFR
420.50(f)(2). which are not then applicable. However.
non-CAS covered or modified CAS-covered con-
tracts awarded at a time the contractor has CAS-
covered contracts requiring compliance with CAS
420. shall be subject to all the requirements of CAS
420. When the requirements of 4 CFR 420.50(eX2)
and 4 CFR 420.30(0(2) are not applicable, the fol-
lowing apply:
(i)	IR&D and B&P costs shall be allocated to
final cost objectives on the same basis of allocation
used for the G&A expense grouping of the profit
center (see 31.001) in which the costs are incurred.
However, when IR&D and B&P costs clearly
benefit other profit centers or benefit the entire
company, those costs shall be allocated through
the G&A of the other profit centers or through
the corporate G&A, as appropriate.
(ii)	If allocations of IR&D or B&P through the
G&A base do not provide equitable cost alloca-
tion. the contracting officer may approve use of a
different base.
(c) Aliowabitin. Except as provided in paragraph (d)
below, costs for I R&D and B&P are allowable only in
accordance with the following:
(1) Companies required to negotiate advance agree-
ments.
(i)	Any company that received payments for
IR&D and B&P costs in a fiscal year, either as a
pnme contractor or subcontractor, exceeding
S4.400.000 from Government agencies, is required to
negotiate with the Government an advance agree-
ment which establishes a ceiling for allowability of
IR&D and B&P costs for the following fiscal year.
This agreement is binding on all Government
agencies, unless prohibited by statute. The require-
ments of Section 203 of Pub. L. 91-441 necessitate
that the Department of Defense (DOD) be the
lead negotiating agency when the contractor has
received more than S4.400.000 in payments for
IR&D and B&P from DOD. Computation of
IR&D and B&P costs to determine whether the
threshold criterion was reached shall include only
recoverable IR&D and B&P costs allocated during
the company's previous fiscal year to prime con-
tracts and subcontracts for which the submission
and certification of cost or pricing data were re-
quired. (Also see paragraph (b) above and 15.804.)
The computation shall include full burdening pur-
suant to CAS 420.
(ii)	When a company meets the criterion in (i)
above, required advance agreements may be nego-
tiated at the corporate level and/or with those
profit centers that contract directly with the Gov-
ernment and that in the preceding year allocated
recoverable IR&D and B&P costs exceeding
S5 50,000. including burdening, to contracts r
subcontracts for which the submission and cei
cation of cost or pricing data were required U
see paragraph (b) above and 15.804). When ceil-
ings are negotiated for separate, profit centers of
the company, the allowability of IR&D and B&P
costs for any center that in its previous fiscal year
did not reach the S550.000 threshold may be deter-
mined in accordance with subparagraph (cX2)
below.
(iii)	Ceilings are the maximum dollar amounts of
total IR&D and B&P costs that will be allowable
for allocation over the appropriate base for that
pan of the company's operation covered by an
advance agreement.
(iv)	No IR&D and B&P cost shall be allowable
if a company fails to initiate negotiation of a re-
quired advance agreement before the end of the
fiscal year for which the agreement b required.
(v)	When negotiations are held with a company
meeting the S4,400.000 criterion or with separate
profit centers (when negotiations are held at that
level under (ii) above), and if no advance agree-
ment is reached, payment for IR&D and B&P
costs shall be reduced below that which the com-
pany or profit center would have otherwise
ceived. The amount of such reduced payment sL
not exceed 75 percent of the'amount which, in the
opinion of the contracting officer, the company or
profit center would be entitled to receive under an
advance agreement. Written notification of the
contracting officer's determination of a reduced
amount shall be provided the contractor. In the
event that an advance agreement is not reached
before the end of the contractor's fiscal year for
which the agreement is to apply, negotiations shall
immediately be terminated, and the contracting of-
ficer shall furnish a determination of the reduced
amount.
(vi)	Contractors may appeal decisions of the
contracting officer to reduce payment. The appeal
shall be filed with the contracting officer within 30
days of receipt of the contracting officer's determi-
nation. (Also see Subpart 42.10.)
(2)^ Companies not required to negotiate advance
agreements. Ceilings for allowable IR&D and B&P
costs -for companies not required to negotiate ad-
vance agreements in accordance with subparagraph
(c)(1) above shall be established by a formula, either
on a company-wide basis or by profit centers, com-
puted as follows:
(i) Determine the ratio of IR&D/B&P cost
total sales (or other base acceptable to the con-
tracting officer) for each of the preceding three
31-23
444-732 0 - 84 - 5
-------
31-205-19
FEDERAL ACQUISITION REGULATION (FAR)
years and average the two highest of these ratios;
Sis average is the IR&D/B&P historical ratio;
(ii)	Compute the average annual IR&D/B&P
osts (hereafter called average), using the two
highest of die preceding three years;
(iii)	IR&D/B&P costs for the center for the cur-
rent year which are not in excess of the product of
the center's actual total sales (or other accepted
base) for the current year and the IR&D/B&P
historical ratio computed under (i) above (hereaf-
ter called product) shall be considered allowable
only to the extent the product does not exceed 120
percent of ihe average. If the product is less than
80 percent of the average, costs up to 80 percent
of the average shall be allowable.
(iv)	However, at the discretion of the contract-
ing officer, an advance agreement may be negotiat-
ed when the contractor can demonstrate that the
formula would produce a clearly inequitable cost
recovery.
(d) Deferred I R&D and B&P costs. (1) IR&D costs
that were incurred in previous accounting periods are
unallowable, except when a contractor has developed a
specific producr a; its own risk in anticipation of recov-
ering the development costs in 'the sale price of the
product provided that—
(i)	The total amount of IR&D costs applicable
o the product can be identified;
(ii)	The proration of such costs to sales of the
product is reasonable;
(iii)	The contractor had no Government business
during the time that the costs were incurred or did
not allocate IR&D costs to Government contracts
except to prorate the cost of developing a specific
product to the sales of that product; and
(iv)	No costs of current IR&D programs are
allocated to Government work except to prorate
the costs of developing a specific product to the
sales of that product.
(2) When deferred costs are recognized, the con-
tract (except firm-fixed-pnce and fixed-price with
economic price adjustment) will include a specific
provision setting forth the amount of deferred IR&D
costs that are allocable to die contract. Toe negotia-
tion memorandum will state the circumstances per-
taining to the case and the reason for accepting the
deferred costs.
31-205-19 Insurance and indemnification.
(a) Insurance by purchase or by self-insuring includes
coverage the contractor is required to carry, or to have
approved, under the terms of the contract and any
other coverage the contractor maintains in connection
• the general conduct of its business. Any contrac-
iesiring to establish a program of self-insurance
cable to contracts that are not subject to CAS 416,
Accounting for Insurance Costs, shall comply with the
self-insurance requirements of that standard as well as
with Part 28 of this Regulation. However, approval of
a contractor's insurance program in accordance with
Part 28 does not constitute a determination as to the
allowability of the program's cost. The amount of in-
surance costs which may be allowed is subject to the
cost limitations and exclusions in-the following subpara-
graphs.
(1)	Costs of insurance required or approved, and
maintained by the contractor pursuant to the con-
tract, are allowable.
(2)	Costs of insurance maintained by the contrac-
tor in connection with the general conduct of its
business are allowable, subject to the following limi-
tations:
(i)	Types and extent of coverage shall follow
sound business practice, and the rates and premi-
ums must be reasonable.
(ii)	Costs allowed for business interruption or
other similar insurance must be limited to exclude
coverage of profit.
(iii)	The cost of property insurance premiums
for insurance coverage in excess of the acquisition
cost of the insured assets is allowable only when
the contractor has a formal written policy assuring
that in the event the insured property is involun-
tarily converted, the new asset shall be valued at
the book value of the replaced asset plus or minus
adjustments for differences between insurance pro-
ceeds and actual replacement cost. If the contrac-
tor does not have such a formal written policy, the
cost of premiums for insurance coverage in excess
of the acquisition cost of the insured asset is un-
allowable.
(iv)	Costs of insurance for the risk of loss of or
riamap* to Government property are allowable
only to the extent that the contractor is liable for
such loss or damage and such insurance does not
cover loss or damage that results from willful mis-
conduct or lack of good faith on Che pan of any of
the contractor's directors or officers or other
equivalent representatives.
(v)	Contractors operating under a program of
self-insurance must obtain approval of the program
when required by 2S.308(a).
(vi)	Costs of insurance on the lives of officers,
partners, or proprietors are allowable only to the
extent that the insurance represents additional
compensation (see 31.205-6).
(3)	Actual losses are unallowable unless expressly
provided for in the contract, except—
(i) Losses incurred under the nominal deductible
provisions of purchased insurance, in keeping with
sound business practice, are allowable for contracts
not subject to CAS 416 and when the contractor
did not establish a self-insurance program. Such
contracts are not subject to the self-insurance re-
quirements of CAS 416. For contracts subject to
CAS 416, and for those made subject to the self-
31-24
-------
FAC 84-21 AUGUST 29,1986
PART 31—CONTRACT COST PRINCIPLES AND PROCEDURES
insurance requirements of that Standard as a result
of the contractor's having established a self-insur-
ance program (see paragraph (a) above), actual
losses may be used as a basis for charges under a
self-insurance program when the actual amount of
losses will not differ significantly from the project-
ed average losses for the accounting period (see 4
CFR 416.50(a)(2)(ii)). In those instances where an
actual loss has occurred and the present value of the
liability is determined under the provisions of CAS
416.50(a)(3)(ii), the allowable cost shall be limited to
an amount computed using as a discount rate the in-
terest rate determined by the Secretary of the Treas-
ury pursuant to 50 U.S.C. App. 1215(b)(2) in effect
at the time the loss is recognized. However, the full
amount of a lump-sum settlement to be paid within a
year of the date of settlement is allowable.
(ii) Minor losses, such as spoilage, breakage, and
disappearance of small hand .tools that occur in the
ordinary course of doing business and that are ribt
covered by insurance are allowable.
(4)	The cost of insurance to protect the contractor
against the costs of correcting its own defects in
materials or workmanship is unallowable. However,
insurance costs to cover fortuitous or casualty losses
resulting from defects in materials or workmanship
are allowable as a normal business expense.
(5)	Premiums for retroactive or backdated insur-
ance written to cover occurred and known losses are
unallowable.
(b)	If purchased insurance is available, the charge for
any self-insurance coverage plus insurance administra-
tion expenses shall not exceed the cost of comparable
purchased insurance plus associated insurance adminis-
tration expenses.
(c)	Insurance provided by captive insurers (insurers
owned by or under the control of the contractor) is
considered self-insurance, and charges for it must
comply with the self-insurance provisions of CAS 416.
However, if the captive insurer also sells insurance to
the general public in substantial quantities and it can be
demonstrated that the charge to the contractor is based
on competitive market forces, the insurance will be
considered purchased insurance.
(d)	The allowability of premiums for insurance pur-
chased from fronting insurance companies (insurance
companies not related to the contractor but who rein-
sure with a captive insurer of the contractor) shall not
exceed the amount (plus reasonable fronting company
charges for services rendered) which the contractor
would have been allowed had it insured directly with
the captive insurer.
(e)	Self-insurance charges for risks of catastrophic
losses are not allowable (see 28.308(e)).
(f)	The Government is obligated to indemnify the
contractor only to the extent authorized by law, as
expressly provided for in the contract, except as provided
in paragraph (a)(3) above.
31.205-*
(g) Late premium payment charges related to en
ployee deferred compensation plan insurance incurred
pursuant to Section 4007 (29 U.S.C. 1307) or Section
4023 (29 U.S.C. 1323) of the Employee Retirement
Income Security Act of 1974 are unallowable.
31.205-20 Interest and other financial costs.
Interest on borrowings (however represented), bond
discounts, costs of financing and refinancing capital
(net worth plus long-term liabilities), legal and profes-
sional fees paid in connection with preparing prospec-
tuses, costs of preparing and issuing stock rights, and
directly associated costs are unallowable except for in-
terest assessed by State or local taxing authorities under
the conditions specified in 31.205-41 (but see 31.205-28).
31.205-21 Labor relations costs.
* Costs incurred in maintaining satisfactory relations
between the contractor and "its employees;'including
costs of shop stewards; labor ananagement committees,
employee publications, and other related activities, -are
allowable.
31.205-22 Legislative lobbying costs.
(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 simila
procedure, through in kind or cash contributior
endorsements, publicity, or similar activities:
(2)	Establishing, administering, contributing to, or
paying the expenses of a political party, campaign, politi-
cal 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 communication with any member or employee
of the Congress or state legislature (including efforts to
influence state or local officials to engage in similar
lobbying activity), or 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 propa-
ganda, or by urging members of the general public or
any segment thereof to contribute to or participate in
any mass demonstration, march, rally, fund raising drive,
lobbying campaign or letter writing or telephone cam-
paign; or
(5)	Legislative liaison activities, including attendance
at legislative sessions or committee hearings, gathering
information regarding legislation, and analyzing th
effect of legislation, when such activities are carried
in support of or in knowing preparation for an effort i
engage in unallowable activities.
. (b) The following activities are excepted from the
coverage of (a) above:
31-25
-------
FAC 84-26
31.205-23
JULY 30,1987
FEDERAL ACQUISITION REGULATION (FAR)
(1)	Providing a technical and factual presentation of
information on a topic directly related to the perform-
ce of a contract through hearing testimony, statements
letters to the Congress or a state legislature, or
.ubdivision, member, or cognizant staff member thereof,
in response to a documented request (including a Con-
gressional Record notice requesting testimony or state-
ments for the record at a regularly scheduled hearing)
made by the recipient member, legislative body or subdi-
vision, or a cognizant staff member thereof; provided
such information is readily obtainable and can be readily
put in deliverable form; and further provided that costs
under this section for transportation, lodging or meals
are unallowable unless incurred for the purpose of offer-
ing testimony at a regularly scheduled Congressional
hearing pursuant to a written request for such presenta-
tion made by the Chairman or Ranking Minority Mem-
ber of the Committee or Subcommittee conducting such
hearing.
(2)	Any lobbying made unallowable by (aX3) above to
influence state legislation in order to directly reduce
contract cost, or to avoid material impairment of the
contractor's 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 indi-
rect costs, total lobbying costs shall be separately identi-
id in the indirect cost rate proposal, and thereafter
iated as other unallowable activity costs.
(d)	Contractors shall submit as pan of their annual
indirect cost rate proposals a certification that the
requirements and standards of this subsection have been
complied with.
(e)	Contractors shall maintain adequate records to
demonstrate that the certification of costs as being allow-
able or unallowable pursuant to this subsection complies
with the requirements of this subsection.
(f)	Time logs, calendars, or similar records shall not
be required to be created for purposes of complying with
this subsection during any particular calendar month
when—
(1)	The employee engages in lobbying (as defined
in paragraphs (a) and (b) of this subsection) 25 percent
or less of the employee's compensated hours of em-
ployment during that calendar month; and
(2)	Within the preceding 5-year period, the organ-
ization has not materially misstated allowable or unal-
lowable costs of any nature, including legislative
lobbying costs. When conditions of subparagraphs
(f)(1) and (2) of this subsection are met, contractors are
not required to establish records to support the allow-
ability of claimed costs in addition to records already
required or maintained. Also, when conditions of sub-
paragraphs (0(1) and (2) of this subsection 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.
(g) Existing procedures should be utilized to resolve in
advance any significant questions or disagreements
concerning the interpretation or application of thfc
subsection.
3L205-23 Losses on other contracts.
An excess of costs over income under any other
contract (including the contractor's contributed portion
under cost-sharing contracts) is unallowable.
31.205-24 Maintenance and repair costs.
(a)	Costs necessary for the upkeep of property (in-
cluding Government property, unless otherwise pro
vided for) that neither add to the permanent value of
the property nor appreciably prolong its intended life,
but keep it in an efficient operating condition, are to be
treated as follows (but see 31.205-11):
(1)	Normal maintenance and repair costs are al-
lowable.
(2)	Extraordinary maintenance and repair costs are
allowable, provided those costs are allocated to the
applicable periods for purposes pf determining con-
tract costs (but see 31.109).
(b)	Expenditures for plant and equipment, including
rehabilitation which should be capitalized and subject
to depreciation, according to generally accepted ac-
counting principles as applied under the contractor's
established policy or, when applicable, according to
CAS 404, Capitalization of Tangible Assets, are allow-
able only on a depreciation basis.
31.205-25 Manufacturing and production engineering
costs.
(a)	The costs of manufacturing and production engi-
neering effort as described in (1) through (4) below are
all allowable:
(1)	Developing and deploying new or improved
materials, systems, processes, methods, equipment,
tools and techniques that are or are expected to be
used in producing products or services;
(2)	Developing and deploying pilot production
lines;
(3)	Improving current production functions, such
as plant layout, production scheduling and control,
methods and job analysis, equipment capabilities and
capacities, inspection techniques, and tooling analysis
(including tooling design and application improve-
ments); and
(4)	Material and manufacturing producibility anal-
ysis for production suitability and to optimize manu-
facturing processes, methods, and techniques.
(b)	This cost principle does not cover:
(1)	Basic and applied research effort (as defined in
31.205-18(a)) related to'new technology, materials,
systems, processes, methods, equipment, tools and
techniques. Such technical effort is governed by
31.205-18, Independent research and development
costs; and
(2)	Development effort for manufacturing or pro-
duction materials, systems, processes, methods,
31-26
-------
PART 31—CONTRACT COST PRINCIPLES AND PROCEDURES
31.205-26
equipment, tools and techniques that are intended for
sale is also governed by 31.205-18.
(c) Where manufacturing or production development
costs are capitalized or required to be capitalized under
the contractor's capitalization policies, allowable cost
will be determined in accordance with the require-
ments of 31.205-11, Depreciation.
31.205-26 Materia] costs.
(a)	Material costs include the costs of such items as
raw materials, parts, sub-assemblies, components, and
manufacturing supplies, whether purchased or manu-
factured by the contractor, and may include such col-
lateral items as inbound transportation and in transit in-
surance. In computing material costs, consideration
shall be given to reasonable overruns, spoilage, or de-
fective work (unless otherwise provided in any con-
tract provision relating to inspecting and correcting
defective work). These costs are allowable, subject to
the requirements of paragraphs (b) through (e) below.
(b)	Costs of material shall be adjusted for income and
other credits, including available trade discounts, re-
funds, rebates, allowances, and cash discounts, and
credits for scrap, salvage, and material returned to ven-
dors. Such income and other credits shall either be
credited directly to the cost of the material or be allo-
cated as a credit to indirect costs. When the contractor
can demonstrate that failure to take cash discounts was
reasonable, lost discounts need not be credited.
(c)	Reasonable adjustments arising from differences
between periodic physical inventories arid book inven-
tories may be included in arriving at costs; provided,
; such adjustments relate to the period of contract per-
1 foimance.
(d)	When materials are purchased specifically for and
'are identifiable solely with performance under a con-
tract, the actual purchase cost of those materials should
be charged to the contract If material is issued from
stores, any generally recognized method of pr
such material is acceptable if that method is cons:
ly applied and the results are equitable. When estin.
of future material costs are required, current market
price or anticipated acquisition cost may be used, but
the basis of pricing must be disclosed.
(e) Allowance for all materials, supplies, and services
that are sold or transferred between any divisions, sub-
sidiaries, or affiliates of the contractor under a common
control shall be on the basis of cost incurred in accord-
ance with this subpart However, allowance may be at
a price when it is the established practice of the trans-
ferring organization to price interorganizational trans-
fers at other than cost for commercial work of the
contractor or any division, subsidiary, or affiliate of the
contractor under a common control, and when the
price—
(1)	Is or is based on an "established catalog or
market price of commercial items sold in substantial
quantities to the general public" in 'Accordance with
15.804; or
(2)	Is the result of "adequate price competition" in
accordance with 15.804 and is the price at which an
award was made to the affiliated organization after
obtaining quotations on an equal basis from such
organization and one or more outside sources
produce the item or its equivalent in significant ql^P
tity.
(3)	Provided, that in either subparagraph (1) or (2)
above—
(i) The price is not in excess of the transferor's
current sales price to its most favored customer
(including any division, subsidiary or affiliate of
(The next page is 31-27.)
31-26.1
-------
PART 31—CONTRACT COST PRINCIPLES AND PROCEDURES
31205-33
the contractor under a common control) for a like
quantity under comparable conditions; and
(ii) The contracting officer has not determined
the price to be unreasonable.
(0 The price determined in accordance with subpara-
graph (eXl) above should be adjusted to reflect the
quantities being acquired and may be adjusted to reflect
actual cost of any modifications necessary because of
contract requirements.
31.205-27 Organization costs.
(a)	Except as provided in paragraph (b) below, ex*
penditures in connection with (1) planning or executing
the organization or reorganization of the corporate
structure of a business, including mergers and acquisi-
tions, or (2) raising capital (net worth plus long-term
liabilities), are unallowable. Such expenditures include
but are not limited to incorporation fees and costs of
attorneys, accountants, brokers, promoters and organiz-
ers, management consultants and investment counsel-
lors, whether or not employees of the contractor. Un-
allowable "reorganization" costs include the cost of
any change in the contractor's financial structure, ex-
cluding administrative costs of short-term borrowings
for working capital, resulting in alterations in the rights
and interests of security holders, whether or not addi-
tional capital is raised.
(b)	The cost of activities primarily intended to pro-
vide compensation will not be considered organization-
al costs subject to this subsection, but will be governed
by 31.205-6. These activities include acquiring stock for
(1) executive bonuses. (2) employee savings plans, and
(3) employee stock ownership plans.
31.205-28 Other business expenses.
The following types of recurring costs are allowable
when allocated on an equitable basis:
(a)	Registry and transfer charges resulting from
changes in ownership of securities issued by the con-
tractor.
(b)	Cost of shareholders' meetings.
(c)	Normal proxy solicitations.
(d)	Preparing and publishing reports to shareholders.
(e)	Preparing and submitting required reports and
forms to taxing and other regulatory bodies.
(f)	Incidental costs of directors' and committee meet-
ings.
(g)	Other similar costs.
'31.205-29 Plant protection costs.
Costs of items such as (a) wages, uniforms, and
equipment of personnel engaged in plant protection, (b)
depreciation on plant protection capital assets, and (c)
necessary expenses to comply with military require-
ments, are allowable.
31.205-30 Patent costs.
(a) The following patent costs are allowable to the
extent that they are incurred as requirements of a Gov-
ernment contract (but see 31.203-33):
(1)	Costs of preparing invention disclosures, re-
ports, and other documents.
(2)	Costs for searching the art to the extent neces-
sary to make the invention disclosures.
(3)	Other costs in connection with the filing and
prosecution of a United States patent application
where title or royalty-free license is to be conveyed
to the Government.
(b)	General counseling services relating to patent
matters, such as advice on patent laws, regulations,
clauses, and employee agreements, are allowable (but
see 31.205-33).
(c)	Other than those for general counseling services,
patent costs not required by the contract are unallowa-
ble. (See also 31.205-37.)
31.205-31 Plant reconversion costs.
Plant reconversion costs are those incurred in restor-
ing or rehabilitating the contractor's facilities to ap-
proximately the same condition existing immediately
before the start of the Government contract, fair wear
and tear excepted. Reconversion costs are unallowable
except for the cost of removing Government property
and the restoration or rehabilitation costs caused by
such removal. However, in special circumstances
where equity so dictates, additional costs may - be al-
lowed to the extent agreed upon before costs are in-
curred. Care should be exercised to avoid duplication
through allowance as contingencies, additional profit or
fee, or in other contracts.
31.205-32 Precontract costs.
Precontract costs are those incurred before the effec-
tive date of the contract directly pursuant to the. nego-
tiation and in anticipation of the contract award when
such incurrence is necessary to comply with the pro-
posed contract delivery schedule. Such costs are allow-
able to the extent that they would have been allowable
if incurred after the date of the contract (see 31.109.)
31.205-33 Professional and consultant service costs.
(a)	Costs of professional and consultant services ren-
dered by persons who are members of a particular
profession or possess a special skill and who are not
officers or employees of the contractor are allowable
subject to paragraphs (b), (c), (d), and (e) below when
reasonable in relation to the services rendered and
when not contingent upon recovery of the costs from
the Government (but see 31.205-30).
(b)	In determining the allowability of costs (including
retainer fees) in a particular case, no single factor or
any special combination of factors is necessarily deter-
minative. However, the following factors, among
others, should be considered:
(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 contractor's capability in the particu-
lar area.
31-27
-------
21-205-34
FAC 84-25 JULY 1, 1987
	FEDERAL ACQUISITION REGULATION (FAR)
(3)	The past pattern of such costs, particularly in
the years prior to the award of Government con-
tracts.
(4)	The impact of Government contracts on the
contractor's business.
(5)	Whether the proportion of Government work
to the contractor's totai business is such as to influ-
ence the contractor in favor of incurring the cost,
particularly when the services rendered are not of a
continuing nature and have little relationship to work
under Government contracts.
(6)	Whether the service can be performed more
economically by employment rather than by con-
tracting.
(7)	The qualifications of the individual or concern
rendering the service and the customary fee charged,
especially on non-government contracts.
(8)	Adequacy of the contractual agreement for the
service (e.g.. description of the service; estimate of
time required; rate of compensation; termination pro-
visions).
(c)	Retainer fees to be allowable must be supported
by evidence that—
(1)	The services covered by the retainer agreement
are necessary and customary.
(2)	The level of past services justifies the amount
of the retainer fees (if no services were rendered,
fees are not automatically unallowable); and
(3)	The retainer fee is reasonable in comparison
with maintaining an in-house capability to perform
the covered services, when factors such as cost and
level of expertise are considered.
(d)	Costs of legal, accounting, and consultant services
and directly associated costs incurred in connection with
organization and reorganization (also see 31.205-27),
defense of antitrust suits, defense against Government
claims or appeals, or the prosecution of claims or appeals
against the Government (see 33.201) are unallowable (but
see 31.205-a"). Such costs incurred in connection with
patent infringement litigation are unallowable unless
otherwise provided for in the contract.
(e)	Except for retainers, fees for services rendered shall
be allowable only when supported by evidence of the
nature and scope of the service furnished. (Also see
31.205-38(c).)
(f)	Costs of legal, accounting, and consultant services
and directly associated costs incurred in connection with
the defense or prosecution of lawsuits or appeals between
contractors arising from either (1) an agreement or con-
tract concerning a teaming arrangement, a joint venture,
or similar arrangement of shared interest; or (2) dual
sourcing, co-production, or similar programs, are unal-
lowable, except when (i) incurred as a result of com-
pliance with specific terms and conditions of the contract
or written instructions from the contracting officer, or
(ii) when agreed to in writing by the contracting officer.
31.205-34 Recruitment costs.
(a) Subject to paragraphs (b) and (c) below, and
provided that the size of the staiT recruited and mair
tained is in keeping with workload requirements, t!
following costs are allowable:
(1)	Costs of help-wanted advertising.
(2)	Costs of operating an employment office
needed to secure and maintain an adequate labor
force.
(3)	Costs of operating an aptitude and educational
testing program.
(4)	Travel costs of employees engaged in recuiting
personnel.
(5)	Travel costs of applicants for interviews.
(6)	Costs for employment agencies, not in excess of
standard commercial rates.
(b)	Help-wanted advertising costs are unallowable if
the advertising—
(1)	Is for personnel other than those required to
perform obligations under a Government contract;
(2)	Does not describe specific positions or classes
of positions;
(3)	Is excessive relative to the number and impor-
tance of the positions or to the industry practices;
(4)	Includes material that is not relevant for re-
cruitment purposes, such as extensive illustrations or
descriptions of the company's products or capabili-
ties;
(5)	Is designed to "pirate" personnel from another
Government contractor, or
(6)	Includes color (in publications).
(c)	Excessive compensation costs offered to prospec-
tive employees to "pirate" them from another Govern-
ment contractor are unallowable. Such excessive costs
may include salaries, fringe benefits, or special emolu-
ments which are in excess of standard industry prac-
tices or the contractor's customary compensation prac-
tices.
31.205-35 Relocation costs.
(a) Relocation costs are costs incident to die perma-
nent change of duty assignment (for an indefinite period
or for a stated period, but in either event for not less than
12 months) of an existing employee or upon recruitment
of a new employee. The following types of relocation
costs are allowable as noted, subject to paragraphs (b)
and (f) below;
(1)	Cost of travel of the employee and members of
the immediate family (see 31.205-46) and transporta-
tion of the household and personal effects to the new
location.
(2)	Cost of finding a new home, such as advance
trips by employees and spouses to locate living quar-
ters. and temporary lodging during the transition pe-
riods not exceeding separate cumulative totals of 60
days for employees and 45 days for spouses an-
dependents, including advance trip time.
(3)	Closing costs (i.e., brokerage fees, legal fees,
appraisal fees, points, finance charges, etc.) incident
31-28
-------
PART 31—CONTRACT COST PRINCIPLES AND PROCEDURES
31.205-35
to the disposition of actual residence owned by the
employee when notified of transfer, except that these
costs when added to the costs described in subpara-
graph (a)(4) below shall not exceed 14 percent of the
sales price of the property sold.
(4)	Continuing costs of ownership of the vacant
former actual residence being sold, such as mainte-
nance of building and grounds (exclusive of fixing up
expenses), utilities, taxes, property insurance, mort-
gage interest, after settlement date or lease date of
new permanent residence, except that these costs
when added to the costs described in subparagraph
(aX3) above, shall not exceed 14 percent of the sales
price of the property sold.
(5)	Other necessary and reasonable expenses nor-
mally incident to relocation, such as disconnecting
and connecting household appliances; automobile
registration; driver's license and use taxes; cutting
and fitting rugs, draperies, and curtains; forfeited util-
ity fees and deposits; and purchase of insurance
against damage to or loss of personal property while
in transit.
(6)	Costs incident to acquiring a home in a new
location, except that (i) these costs will not be allow-
able for existing employees or newly recruited em-
ployees who, before the relocation, were not home-
owners and (ii) the total costs shall not exceed 5
percent of the purchase price of the new home.
(7)	Mortgage interest differential payments, except
that these costs are not allowable for existing or
newly recruited employees who. before the reloca-
tion, were not homeowners and the total payments
(The next page is 31 -29.)
31-28.1
-------
FAC 84-25 JULY 1, 1987
PART 31—CONTRACT COST PRINCIPLES AND PROCEDURES
are limited to an amount determined as follows:
(i)	The difference between the mortgage interest
rates of the old and new residences times the cur-
rent balance of the old mortgage times 3 years.
(ii)	When mortgage differential payments are
made on a lump sum basis and the employee leaves
or is transferred again in less than 3 years, the
amount initially recognized shall be proportionate-
ly adjusted to reflect payments only for the actual
time of the relocation.
(8)	Rental differential payments covering situations
where relocated employees retain ownership of a
vacated home in the old location and rent at the new
location. The rented quarters at the new location
must be comparable to those vacated, and the allow-
able differential payments may not exceed the actual
rental costs for the new home, less the fair market
rent for the vacated home times 3 years.
(9)	Cost of canceling an unexpired lease-
Co) The costs described in paragraph (a) above must
ilso meet the following criteria to be considered allow-
able:
(1)	The move must be for the benefit of the em-
ployer.
(2)	Reimbursement must be in accordance with an
established policy or practice that is consistenly fol-
lowed by the employer and is designed to motivate
employees to relocate promptly and economically.
(3)	The costs must not otherwise be unallowable
under S ubpart 31.2.
(4)	Amounts to be reimbursed shall not rxceed the
.employee's actual expenses, except that for miscella-
neous costs of the type discussed in subparagraph
(a)(5) above, a Hat amount, not to exceed S1.000,
may be allowed in lieu of actual costs.
(c) The following types of costs are not allowable:
. (1) Loss on sale of a home.
- (2) Costs incident to acquiring a home in a new
location as follows:
(i)	Real estate brokers fees and commissions.
(ii)	Cost of litigation.
(iii)	Real and personal property insurance
against damage or loss of property
(iv)	Mongage life insurance.
(v)	Owner's title policy insurance. when such
insurance was not previously carried by the em-
ployee on the old residence (however, cost of a
mortgage title policy is allowable).
(vi)	Property taxes and operating or mainte-
nance costs.
" (3) Continuing mortgage principal payments on
residence being sold.
" (4) Payments for employee income or FICA
(social security) taxes incident to reimbursed reloca-
tion costs.
"(5) Payments for job counseling and placement
31.205-36
assistance to employee spouses and dependent*
were not employees of the contractor at tl
location.
(6) Costs incident to furnishing equity or none-
quity loans to employees or making arrangements
with lenders for employees to obtain lower-than-
market rate mortgage loans.
(d)	If relocation costs for an employee have been
allowed either as an allocable indirect or direct cost,
and the employee resigns within 12 months for reasons
within the employee's control, the contractor shall
refund or credit the relocation costs to the Govern-
ment.
(e)	Subject to the requirements of paragraphs (a)
through (d) above, the costs of family movements and
of personnel movements of a special or mass nature are
allowable. The cost, however, should be assigned on
the basis of work (contracts) or time period benefited.
(0 Relocation costs (both outgoing and return) of em-
ployees who are hired for performance on specific con-
tracts or long-term field projects are allowable if—
(1)	The term of employment is not less than 12
months;
(2)	The employment agreement specifically limits
the duration of employment to the time spent on the
contract or field project for which the employee is
hired;
(3)	The employment agreement provides for
relocation to the employee's permanent and prii.
home immediately prior to the outgoing relocation, or
other location of equal or lesser cost; and
(4)	The relocation costs are determined under the
rules of paragraphs (a) through (d) above. However,
the costs to return employees, who are released from
employment upon completion of field assignments
pursuant to their employment agreements, are not sub-
ject to the refund or credit requirement of paragraph
(d).
31.205-36 Rental costs.
(a)	This subsection is applicable to the cost of renting
or leasing real or personal property, except ADPE (see
31.205-2), acquired under "operating leases" as defined
in Statement of Financial Accounting Standards No. 13
(FAS-13), Accounting for I. .casts. Compliance with
31.205-1 l(m) requires that assets acquired by means of
capital leases, as defined in FAS-13, shall be treated as
purchased assets; i.e., be capitalized and the capitalized
value of such assets be distributed over their useful
lives as depreciation charges, or over the lease term as
amortization charges, as appropriate (but see subpara-
graph (b)(4) below).
(b)	The following costs are allowable:
(1) Rental costs under operating leases, to
extent that the rates are reasonable at the time o
lease decision, after consideration of (i) rental t
of comparable property, if any; (ii) market conditions
in the area; (iii) the type, life expectancy, condition,
31-29
-------
31.205-37
FAC 84-15 APRIL 7,1986
	FEDERAL ACQUISITION REGULATION (FAR)
and value of the property leased; (iv) alternatives
available; and (v) other provisions of the agreement.
(2)	Rental costs under a sale and leaseback ar-
rangement only up to the amount the contractor
would be allowed if the contractor retained title.
(3)	Charges in the nature of rent for' property
between any divisions, subsidiaries, or organization
under common control, to the extent that they do
not exceed the normal costs of own en hip, such as
depreciation, taxes, insurance, facilities capital cost of
money, and maintenance (excluding interest or other
unallowable costs pursuant to Part 31), provided that
no pan of such costs shall duplicate any other al-
lowed cost. Rental cost of personal property leased
from any division, subsidiary, or affiliate of the con-
tractor under common control, that has an estab-
lished practice of leasing the same or similar proper-
ty to unaffiliated lessees shall be allowed in accord-
ance with subparagraph (bXl) above.
(4)	Rental costs under leases entered into before
March 1, 1970 for the remaining term of the lease
(excluding options not exercised before March 1,
1970) to the extent they would have been allowable
under Defense Acquisition Regulation (Formerly
ASPR) 15-205.34 or Federal Procurement Regula-
tions section 1-15.203-34 in effect 1 January 1969.
(c) The allowability of rental costs under unexpired
leases in connection with terminations is treated' in'
31.205-42(e).
31.205-37 Royalties and other costs for. use of patents.
(a)	Royalties on a patent or amortization of the cost
of purchasing a patent or patent rights necessary' for-
the proper performance of the contract and applicable
to contract products or processes are allowable
unless—
(1)	The Government has a license or the right to a
free use of the patent:
(2)	The patent has been adjudicated to be invalid,
or has been administratively determined to be inval-
id:
(3)	The patent is considered to be unenforceable;
or
(4)	The patent is expired.
(b)	Care should be exercised in determining reason-
ableness when the royalties may have been arrived at
as a result of less-than-arm's-length bargaining; e-K.,
royalties—
(1)	Paid to persons, including corporations, affili-
ated with the contractor;
(2)	Paid to unaffiliated parties, including corpora-
tions. under an agreement entered into in contempla-
tion that a Government contract would be awarded;
or
(3)	Paid under an agreement entered into after the.
contract award.
(c)	In any case involving a patent formerly owned
by the contractor, the royalty amount allowed should
not exceed the cost which would have been allowed
had the contractor retained title.
(d)	See 31.109 regarding advance agreements.
31.205-38 Selling costs.
(a)	"Selling" is a generic term encompassing all ef-
forts to market the contractor's products or services,
some of which are covered specifically in other subsec-
tions of 31.205. Selling activity includes the following
broad categories:
(1)	Advertising.
(2)	Corporate image enhancement including
broadly-targeted sales efforts, other than advertising.
(3)	Bid and proposal costs.
(4)	Market planning.
(5)	Direct selling.
(b)	Advertising costs are defined at. 31.205-l(b) and
are subject to the allowability provisions of 31.205- 1(d)
and (0. Corporate image enhancement-activities are in-
cluded within the definitions of public relations at
31.205-l(a) and entertainment at 31.205-14 and are sub-
ject to the allowability provisions at 31.205-1 (e)jaad (0
and 31.205-14, respectively. Bid and proposal costs are
defined at 31.205-18 and have their allowability control-
led by that subsection. Market plamiing involves market
research and analysis and generalized management plan-
ning concerned with development of the contractor's
business. The allowability of long-range market planning
costs is controlled by the provisions of 31.205-12. Other
market planning costs are allowable to the extent that
they are reasonable. Costs of activities which are correct-
ly classified and disallowed tinder cost' principles
referenced in this paragraph (b) are'not to be recon-
sidered for reimbursement under any other provision of
this subsection.
(c)	Direct selling efforts are those acts or actions to in-
duce particular customers to purchase particular pro-
ducts or services of the contractor.' Direct selling is
characterized by person-to-person contact and includes
i such activities as familiarizing a potential customer with
the contractor's products or services, conditions of sale,
service capabilities, etc. It also includes negotiation,
liaison between customer and contractor personnel, tech-
nical and consulting, activities, individual demonstra-
tions, and any other activities haying as-their purpose the
application or adaptation of the contractor's products or
services for a particular customer's use. The cost of direct
selling efforts is allowable,if reasonable in axnoum.
. (d), The costs of any selling efforu other.than those ad-
dressed in paragraphs (b) or. (c) of this subsection are
unallowable.
(e)	Costs of the type identified in paragraphs (b), (c),
and (d) of this subsection are often, commingled on the
contractor's books in the selling expense, accpjint because
these activities are performed by the sale departments.
However, identification and segregation .of unallowable
costs is required under the'provisions of"3 f.201-6 and
CAS 405, and such costs, are not allowable merely
31-30
-------
FAC 84-26 JULY 30,1987
PART 31 —CONTRACT COST PRINCIPLES AND PROCEDURES	
31.205-40
because they are incurred in connection wiih allowable
selling activities.
|l '(f)- Notwithstanding any other provision of this sub-
section, costs of direct selling efforts, as defined in para-
graph (c) of this subsection, incurred in connection with
potential and actual Foreign Military Sales, as defined by
the Arms Export Contract Act, or foreign sales of mili-
tary products or services are unallowable on U.S. Gov-
ernment contracts for U.S. Government requirements.
(g) Notwithstanding any other provision of this
subsection, sellers' or agents' compensation, fees, com-
missions, percentages, retainer or brokerage fees,
whether or not contingent upon the award of contracts,
are allowable only when paid to bona fide employees or
established commercial or selling agencies maintained by
the contractor for the purpose of securing business (see
3.408-2).
31.205-39 Serrite and warranty costs.
Service and warranty costs include those arising
¦ from fulfilhncr.: of any contractual obligation of a con-
tractor to provide services such as installation, training.
correcting defects in the products, replacing defective
parts, and making refunds in the case of inadequate
performance. When not inconsistent with the term*
the contract, such service and warranty costs ar
lowable. However, care should be exercised to a
duplication of the allowance as an element of both
estimated product cost and risk.
31.205-40 Special tooling and special test equipment
costs.
(a)	The terms "special tooling" and "special test
equipment" are defined in 45.101.
(b)	The cost of special tooling and special test equip-
ment used in performing one or more Government
contracts is allowable and shall be allocated to the
specific Government contract or contracts for which
acquired, except that the cost of (1) items acquired by
the contractor before the effective date of the contract
(or replacement of such items), whether or not altered
or adapted for use in performing the contract, and (2)
items which the contract schedule specifically excludes,
shall be allowable only as depreciation or amortization.
(The next page is 31-31.)
31-30.1
-------
PART 31—CONTRACT COST PRINCIPLES AND PROCEDURES
31.2QS-42
(c) When items are disqualified as special tooling or
special test equipment because with relatively minor
expense they can be made suitable for general purpose
use and have a value as such commensurate with their
value as special tooling or special test equipment, the
cost of adapting the items for use under the contract
and the cost of returning them to their prior configura-
tion are allowable.
3005-41 Taxes.
(a)	The following types of costs are allowable:
(1)	Federal, State, and local taxes (see Part 29),
except as otherwise provided in paragraph (b) below
that are required to be and are paid or accrued in
accordance with generally accepted accounting prin-
ciples. Fines and penalties are not considered taxes.
(2)	Taxes otherwise allowable under subparagraph
(aXl) above, but upon which a claim of illegality or
erroneous assessment exists; provided the contractor,
before paying such taxes—
(i)	Promptly requests instructions from the con-
tracting officer concerning such taxes; and
(ii)	Takes all action directed by the contracting
officer arising out of subparagraph (2)(i) above or
an independent decision of the Government as to
the existence of a claim of illegality or erroneous
assessment, to (A) determine the legality of the
assessment or (B) secure a refund of such taxes.
(3)	Pursuant to subparagraph (a) (2) above, the
reasonable costs of any action taken by the contrac-
tor at the direction or with the concurrence of the
contracting officer. Interest or penalties incurred by
the contractor for non-payment of any tax at the
direction of the contracting officer or by reason of
the failure of the contracting officer to ensure timely
direction after a prompt request.
(b)	The following types of costs are not allowable:
(1)	Federal income and excess profits taxes.
(2)	Taxes in connection with financing, refinanc-
ing, refunding operations, or reorganizations (see
31.205-20 and 31.205-27).
(3)	Taxes from which exemptions are available to
the contractor directly, or available to the contractor
based on an exemption afforded the Government,
except when the contracting officer determines that
the administrative burden incident to obtaining the
exemption outweighs the corresponding benefits ac-
cruing to the Government When partial exemption
from a tax is attributable to Government contract
activity, taxes charged to such work in excess of that
amount resulting from application of the preferential
treatment are unallowable. These provisions intend
that tax preference attributable to Government con-
tract activity be realized by the Government The
term "exemption" means freedom from taxation in
whole or in part and includes a tax abatement or
reduction resulting from mode of assessment, method
of calculation, or otherwise.
(4)	Special assessments on land that represent jcapi-
tal improvements..:
(5)	Taxes (including excises) on real or personal
property, or on the value, use, possession 
-------
3L3QS-42
FEDERAL ACQUISITION REGULATION (FAR)
i be used-on other work of the contractor. Contempora-
neous purchases of common items by the contractor
shall be regarded as evidence that such items are rea-
sonably usabie on the contractor's other work. Any
acceptance of common items as allocable to the termi-
nated portion of the contract should be limited to the
extefit that the quantities of such items on hand, in
transit, and on order are in excess of the reasonable
quantitative requirements of other work.
"h (b) Costs continuing after termination. Despite all rea-
sonable efforts Jb^ the contractor, costs which cannot
be discontinued tmsoediateJy after the effective date of
termination are generally allowable. However, any
costs continuing after the effective date of the termina-
tion due. to the negligent or willful failure of the con-
tractor to. discontinue the costs shall be unallowable.
.,(c)Jnitial costs. Initial coats (see 15.804—6(f))» includ-
ing starting load and preparatory costs, are allowable
as follows:
(1)..S:armig	lo*d costs not fully absorbed because
of tsrxninatiori art scnrecurring labor, mntrrial, and
relaxed overhead costs incurred in the early part of
production and result from farrnrs such as—
(i)	Excessive- spoilage due to inexperienced
labor;
(ii)	Idle time and subnormal production due to
testing and changing production methods;
Jiii) Training; and
0v)'.Lack';of familiarity or experience with the
piquet, materials', or manufacturing processes.
(2)	"Preparatory* posts incurred in preparing to per-
form. the. terminated contract, include such costs as
- those incurred. for initial plant rearrangement and
alterations, management end personnel organization,
¦and production planning. They do not include spe-
cial machinery and equipment and starting load
jcosp. . .
(3)	When initial costs are included in the settle-
: ment 'proposal, as a direct charge, such costs shall not
also bc included in overheads Initial cs»3ts attributable
to only one contract shall , not br allocated to other
' "contracts. ¦
(4)	If initial ,costs.are claimed and have not been,
'segregated on the contractor's books, they shall be
segregated for settlement purposes from cost reports
and schedules- reflecting that high unit cost incurred <
during the early stages of the'contract
^3) If the' settlement proposal is oa the inventory
'-basis;' inirial cbsts should normally be allocated on
the baisis'of total end items called for by the contract
immediately before1 termination; however, if the con-
tract intiuides' end items of a diverse nature, some
^other' eguitabie basismay be used, such as machine
, pOtaborfaours;
(d) Loss of useful value. Loss of useful value of spe-
aal tooling, and special machinery and equipment is
generally allowable, provided—
(1)	The special tooling, or special machinery and
equipment is not reasonably capable of use in the
other work of the contractor;
(2)	The Government's interest is protected by
transfer of title or by other means deemed appropri-
ate by the contracting officer; and
(3)	The loss of useful value for any one terminated
contract is liming to that portion of the acquisition
cost which bears the same-ratio to the total acquisi-
tion cost as the tenmnated portion of the contract
bears to the entire terminated contract and other
Government contracts for which the special tooling,
or special machinery and equipment was acquired.
(e)	Rental under unexpired leases. Rental costs under
unexpired leases, less the residual value of such leases,
are generally allowable when, shown to have been rea-
sonably necessary for the performance of the terminat-
ed contract, if—
(1)	The amount of rental claimed does not exceed
the reasonable use value of the property 1 rased for
the period of the contract and such further period as
may be reasonable; and
(2)	The contractor makes all reasonable efforts to
teru.vnntff, assign, settle, or otherwise reduce the cost
of such lease.
(f)	Alterations of leased property. The cost of alter-
ations and reasonable restorations required by the lease
tray be allowed when the alterations were necessary
for performing the contract
(g)	Settlement expenses. (1) Settlement expenses, in-
cluding the following, are generally allowable:
(i)	Accounting, legal, clerical, and similar costs
reasonably necessary for—
(A)	The preparation and presentation, includ-
ing supporting data, of settlement claims to the
contracting officer; and
(B)	The termination and settlement of subcon-
tracts.
(ii)	Reasonable costs for the storage, transporta-
tion. protection, and disposition of property ac-
quired or produced for the contract.
(iii)	Indirect costs related to salary and wages
incurred as settlement expenses in (I) and (ii); nor-
mally, such indirect costs shall be limited to pay-
roll taxes, fringe benefits, occupancy costs, and
immediate supervision costs.
(7.) If settlement expenses are significant, a cost
. account or work order shall be established to sepa-
rately identify and accumulate them.
(h)	Subcontractor claims. Subcontractor claims, in-
cluding the allocable portion of the claims common to
the contract and to other work of the contractor, are
generally allowable. An appropriate share of the con-
tractor's indirect expense may be allocated to the
amount of settlements with subcontractors; provided,
that the amount allocated is reasonably proportionate
to the relative benefits received and is otherwise con-
31-32
-------
FAC 84-25 JULY 1, 1987
PART 31—CONTRACT COST PRINCIPLES AND PROCEDURES '-
sistent with 31.20M and 31.203(c). The indirect ex-
pense so allocated shall exclude the same and similar
costs claimed directly or indirectly as settlement ex-
penses.
31.205-43 Trade, business, technical and professional
activity costs.
The following types of costs are allowable:
(a)	Memberships in trade, business, technical, and
professional organizations.
(b)	Subscriptions to trade, business, professional, or
other technical periodicals.
(c)	Meetings and conferences, including meal$, trans-
portation, rental of meeting facilities and other inciden-
tal costs when the primary purposes of the .incurrence
of the costs is :he dissemination of technical informa-
tion or stimulation of production.
31.205-44 Training and education costs.
(a)	Allowable costs. Training and education costs
are allowable to the extent indicated below.
(b)	Vocational training. Costs of preparing and main-
| taining a noncollege. level program of instruction, includ-
ing but not limited to on-the-job, classroom, and appren-
ticeship training, designed to increase the vocational ef-
| fectiveness of employees, are allowable. These costs in-
clude (1) salaries or wages of trainees (excluding overtime
compensation), (2) salaries of the director of training and
staff when the training program is conducted by the con- .
tractor, (3) tuition and fees when the training is in an in-
stitution not operated by the contractor, and/or (4)>train-
ing materials and textbooks.
(c)	Part-time college level education. Allowable costs
of pan-time college education at an undergraduate or.
postgraduate level, including that provided at the con-
tractor's own facilities, are limited to—
(1)	Fees and tuition charged by t)ie educational
institution, or, instead of tuition, instructors' salaries
and the related share of indirect cost of the educa-
tional institution, to the extent that the sum thereof is
not in excess of the tuition that would have been
paid to the participating educational institution;
(2)	Salaries and related costs of instructors who are
employees of the contractor;
(3)	Training materials and textbooks; and'
(4)	Straight-time compensation of each employee
for time spent attending classes during working hours'"
not in excess of 156 hours per year where circumstances
do not permit the operation of classes or attendance at:
classes after regular working hours. In uriftsual cases,
the period may be extended (see paragraph \h) below).
1(d) Full-time education. Costs of tuition, fees,> training
materials and textbooks (but not subsistence, salary, or
any other emoluments) in connection with full-time edu-^
cation, including that provided at the contractor's own;
facilities, at a postgraduate but not undergraduate college:
level, are allowable only when the CQu&e or degree pur-
sued is related to the field in which-the employ eeis work-
ing or may reasonably he expected-to work andare lim-
&30S-44
ited to a total period not to exceed 2 school yearj.qj; the
length of the degree program, whichever is less, Jor each
employee so trained.	~
(e) Specialized-programs. Costs ,of attendance of up, to
16 weeks per -employee per. year. _at .specialized., pro-
grams specifically designed .to enhance,the ^effectiveness
of managers or: to .prepare employees for suet) positions
are allowable. Such costs include enrollment fees and
'	,	.-n
related charges .and .employees'salaries, subsistence,,
training materials; textbooks, aridtravd.Costs allowable.!
under this paragraph do not.mclude costs for Joiirses.tfiat|
are pan of a degree^rienteti curritulum," Which are only."
allowable pursuannto paragraphs (^firitf f'tfTofthissu b-'
section.			"*
(0 Other expenses. Maintenance expense:aHd normal
depreciation or fair rental on facilities bwtied-oHeasedby
the contractor for'training purpose ateallbwable-in ac-
cordance with 3l-20S-ll~: 31.2ff5-17f-3L205-"24, and
"31.205.36.
(g)	Grants. Grants ^coeducational or training institu-
tions, including the donation of facilities or. other prop^
erties, scholarships, and. fellowships, are considere3"!€oh-:
tributions and are unallowable.
(h)	Advance agreements..
(1)	Training and education costs, in excess of those
otherwise allowable under (c) and (d) of this-subsec-
tion, - including subsistence,, salaries..or any other
emoluments,- may be allowed to the extent set. forth in
an advance agreement negotiated under 11,1097To be
considered, for ao_ady&nce agreement, the contractor
must. demonstrate", thai the"costs' ^e"cqnsistently in-
cused under an established ^managerial; engineering,
or scientific training and education prbgram, and that
the course or SegreS' pursued' is Tdateci to the field in
which employees are now working or'mar reasonably
be expected'to work: Before ehteringnnto'the advance
agreement, the contracdng officer shall give considera-
tion to such factors as— -
(i)	The length of employees' service with the con-
tractor*"'
(ii)	- EBiploytfe's past ^performance and potential;
(iii)	Whether employees are.iiL-formal. develop-
• mentprograms; and.:
(iv)	The total number of participanng empkjyees-
(2)	Any advahce agreement must inciudea provision
requiring the: contractor to refund to the; .Government
training and education costrfor employpcLwhe.resign
with 12 months:of completion ofsuuehj^ajning or edu-
cation for reasons,within an. employee^ control. .
CO Training or education COfis for-other than, bona-fide
employee. Costs, of tuition fpes, textbooks, and simliar
or related benefitsprovided- for ot£er than ¦ bona-fide
employees are unallowable.. except that thp_ SQJts in-
curred for educating^ empjoyep,, dependents . (primary
and secondary lev<^. studies) , wh^n" theydnployee is
working in a foreign couhtry where^uBric^education is
¦ not available and where suitable, private g&UCadon is
31-33
-------
FAC 84-25
-31.205-45 ¦	
¦ inordinately expensive may be included in overseas dif-
: ferential.
"(j) Employee dependent education plans. Costs of col-
lege plansfbremployee dependents are unallowable.
31.205^43 Transportation costs.
Allowable transportation costs include freight, ex-
press," cartage, and postage charges relating to goods
purchas«i, .in process, or delivered. When these costs
"can lb£ identified "with rite items involved, they may be
directly costed Is'transportation costs or added to the
cost of sttcirltems.-*' 'V/hen identification with the materi-
als'deceived cannot be made, inbound transportation
-costs may be charged to the appropriate indirect cost
"account if the contractor follows a consistent and
: equitable-'procedure.' Outbound freight, if reimbursable
"under"the 'terms of the contract, shali be treated as a
¦direct cost. '¦ '¦
31:205-46 Travel costs.
^a')(l) Costs for transportation, lodging, meals, and
incidental expenses incurred by contractor personnel
on official company business are allowable subject to
paragraphs (b) through (f) of this subsection. Costs for
'transportation may be based on mileage rates, actual
costs incurred, or on a combination thereof, provided
the method used results in a reasonable charge. Costs
For lodging, meais, and incidental expenses may .be
based on.per diem, actual expenses, or a combination
thereof, provided.the method used results in a reason-
able charge.
'..(2) .Except a? provided ^subparagraph (a)(3) of.this
subsection^ costs incurred for lodging, meals, and inci-
dental/expenses (as.defined .in the, regulations cited in
(a)(2)(i) "through, (iii) of this subparagraph) shall be
considered to.'be/reasonable, and allowable only to the
extent/that they".do pot exceed on.a daily basis the
maximum.per diem*ratesin effect.at the.time of travel
Wset.rprtti injthe— ;
"(j) Federal Travel Regulations, prescribed by the
General Sendees Administration, for travel in the
"cqnte^mrndus^48'_U nited States, available on a sub-
scription. basis frpnjT. thjst Superintendent of Docu-
ments, U.S."Government'Printing Office, Washing-
ton, DC 20402. Stock No. 022-001-81003^7*
(ii)	Joint Travel Regulations, Volume 2, DoD Ci-
vilian Personnel, Appendix A, prescribed by the De-
partment of Defense, for travel in Alaska, Hawaii,
The Commonwealth of Puerto Rico, and territories
and possessions of the United States, available on a
subscription basis from the Superintendent of Docu-
ments, U.S. Government Printing Office, Washing-
ton. DC 20402. Stock No. 908-010-00000-1; or
(iii)	Standardized Regulations (Government Civil-
ians, Foreign Areas), Section 925, "Maximum
Travel Per Diem Allowances for Foreign Areas,"
prescribed by the Department of State, for tra"vel;iri
areas not covered in (a)(2)(i) and (ii) of this subpara-
graph, available on a subscription basis from the
JULY 1, 1987
FEDERAL ACQUISITION REGULATION (FAR)
Superintendent of Documents, U.S. Government
Printing Office, Washington, DC 20402, Stock No.
744-008-00000-0.
(3)	In special or unusual situations, actual costs in
excess of the above-referenced maximum per diem
rates are allowable provided that such amounts do not
exceed the higher amounts authorized for Federal civil-
ian employees as permitted in the regulations refer-
enced in (a)(2)(i), (ii), or (iii) of this subsection. For
such higher amounts to be allowable, all of the follow-
ing conditions must be met:
(i)	One of the conditions warranting approval of
the actual expense method, as set forth in the regula-
tions referenced in (a)(2)(i), (ii), or (iii) of this sub-
section, must exist.
(ii)	A written justification for use of the higher
amounts must be approved by an officer of the con-
tractor's organization or designee to ensure that the
authority is properly administered and controlled to
prevent abuse.
(iii)	If it becomes necessary to exercise the author-
ity to use the higher actual expense method repeti-
tively or on a continuing basis in a particular area,
the contractor must obtain advance approval from
the contracting officer.
(iv)	Documentation to support actual costs in-
curred shall be in accordance with the contractor's
established practices provided that a receipt is re-
quired for each expenditure in excess of S25.00. The
approved justification required by (a)(3)(ii) and, if
applicable, (a)(3)(iii) of this subparagraph must be
retained.
(4)	Subparagraphs (a)(2) and (a)(3) of this subsec-
tion do not incorporate the regulations cited in
(a)Q)(i),	(ii), and (iii) in their entirety. Only the cover-
age in the referenced regulations dealing with special or
unusual situations, the maximum per diem rates, and
definitions of lodging, meals, and incidental expenses
are incorporated herein.
(5)	An advance agreement (see 31.109) with respect
to compliance with subparagraphs (a)(2) and (a)(3) of
this subsection may be useful and desirable.
(b)	Travel costs incurred in the normal course of
overall administration of the business are allowable and
shall be treated as indirect costs.
(c)	Travel costs directly attributable to specific con-
tract performance are allowable and may be charged to
the contract under 31.202.
(d)	Airfare costs in excess of the lowest customary
standard, coach, or equivalent airfare offered during
normal business hours are unallowable except when such
accommodations require circuitous routing, require
travel during unreasonable hours, excessively prolong
travel, result in increased cost that would offset transpor-l
tation savings, are not reasonably adequate for the'
physical or medical needs of the traveler, or are not
reasonably available to meet mission requirements.
31-34
-------
PART 31 —CONTRACT COST PRINCIPLES AND PROCEDURES
31.205-47
However, in order for airfare costs in excess of the above
siandard airfare to be allowable, the applicable condi-
tion(s) set forth above must be documented and justified,
(e) (1) "Cost of travel by contractor-owned, -leased,
or -chartered aircraft," as used in this paragraph, in-
cludes the cost of lease, charter, operation (including
personnel), maintenance, depreciation, insurance, and
other related costs.
(2)	The costs of travel by contractor-owned, -leased,
or -chartered aircraft are limited to the standard airfare
described in paragraph (d) of this subsection for the
flight destination unless travel* by such aircraft" is
specifically required by contract specification, term, pr
condition, or a higher amount is approved by the con-
tracting officer. A higher amount may be agreed to
when one or more of the circumstintffcf for justifying
higher than standard airfare liSted in paragraph (d) of
this subsection are applicable or When an advance
agreement under subparagraph (e)(3) of this subsection
has been executed. In all cases, travel by contractor-
owncd.,-1 eased, or -chartered aircraft must be fully
documented and justified. For each contractor-owned,
-leased, or -chartered aircraft used for any business
purpose which is charged or allocated, directly or in-
directly, to a Government contract/the contractor
must maintain and make available manifest/logs for
all flights on such company aircraft'. As a minimum,
the manifest/log shall indicate—
CO Date, time, and points of departure;
fii) Destination, date, and tixne'of arrival;
(iii)	Name of each passenger and relationship to '
the contractor;
(iv)	Authorization for trip; and
(v)	Purpose of trip.
(3)	Where an advance agreement r is proposed (see-
31.109), consideration may be given to the following:'
(i)	Whether scheduled commercial airlines or
other suitable, less costly, travel -facilities are
available at reasonable times, with reasonable fre-
quency, and serve the required "destinations conven-
iently.
(ii)	Whether increased flexibility in scheduling
results in time savings and more effective use of per-':
sonnel that would outweigh additional travel costs..
(0 Costs of contractor-owned pr-leaso^ automobiles,
as used in this paragraph, include the-costs of lease,
operation (including persounci),.maintenance^ deprecia-
tion. insurance, etc. .Thee- J»sts - are ..'.allpwable, if
reasonable, to the extent r'that the automobiles are used
for company business'. Tim pom.on.Vo/ the cost of
company-furnished auto^obQe tl^it'relues to personal
use by employees (including"trl^imrtatioh' to and from
work) is compensation" Y6fc perstfn&T' services and is
unallowable as stated itf!j 1^05^6(^(2^'
31.20&47, Defense of. fraud-proceedings.
(a),	Definitions. "Costs,." as. used	subsection,
include, but are not limited to, administrative and cleri-
cal expenses;, the cost of-legal services, .wjiether per-
formed by inrhouse or private counsel;;_thjs costs of the
services, of accountants, consultants,- or -others retained
by the contractor to assist it; the s^laria^uid wages of
employees, officers, and t directors; a^td any-of the fore-
going costs incurred before commencing the formal
judicial or administrative proceedings which bear a
direct relationship to the proceedings.
"Fraud," as used in this subsection, means (1) acts of
fraud or corruption or attempts to defraud the Govern-
ment or to corrupt its agents, (2)'acts which constitute
a cause' for debarment or suspension under 9.406-2(a)
and 9.407>2(a) and (3)' acts which violate the False
Gaiim Act, 31 U.S.C^ sections 3729-3731, or the Anti-
Kickback Act, 41 U.S.C., sedioni 51 and 54.
(b)	Costs incurred in connection with defense of any
(1) criminal or civil investigation, grand jury proceeding,
or prosecution; (2) dvil litigation; or (3) administrative
proceedings 'such as"$uipensi'Ori orcdebanrient, or any
combination of the foregoing," brbught ~by the Govern-
ment against a contracted, its'iigehts'or employees, are
unallowable when thVChafges," which are the subject of
the investigation, proceedings, or prosecution, involve
fraud or similar offenses (indudihg filing; of a false cer-
tification) on the pan.oflhejcbntractor, its agents or
employees', and result in cdhvicnpn (including conviction
entered on a plea of nolff contendere) rjudgifaent against
the contractor, itV'a^t^br. OT^ioVees, or decision to
debar or suspend, or arfi' fesolVed by'cdnscnt or com-
promise.
(i ne next- pag^ts 31-3 5.)
31-34.1
-------
FAC 84-15
APRIL 7,1986
PART 31—contract cost principles and procedures
31.701
(c)	Iricircumsiances where the charges of fraud are
resolved by consent or compromise, the parties may
agree as to the extent of allowability of such costs as a
part of such resolution.
(d)	Costs which may be*unallowable under 31.205-47,
includiftg'd'ir^yra»ociaied costs, shall be differentiated
and accounted forbythecontr actor so as to be separately
identifiable! During the'pendency of any proceeding or
investigation covered bjrparagraph (b) of this subsection, ^
the contracting officer should generally withhold pay-~
ment of such costsJ-Howeverv the contracting officer may
in appropriate circumstances provide for -conditional1
payment upon provision of adequate security, or other
adequate assurance, and agreement by the contractor to
repay all unallowable costs, plus interest, if a conviction
or judgment is rendered against it.
31.205-48 Deferred research and development costs.
"Research and development," as used in this subsec-
tion. means the type of technical effort which is de-
scribed in 31.-20S-18 but which is sponsored by, or
required in performance of, a contract or grant. Re-
search and development costs (including amounts cap-
italized) that were incurred before the award of a par-
ticular contract are unallowable except when allowable
as precontract costs. In addition, when costs are in-
curred in excess of either the price of a contract or
amount of a grant for research and development effort,
such excess may not be allocated as a cost to any other
Government contract.
31.205-49 Goodwill.
Goodwill, an unidentifiable intangible asset, originates
under the purchase method of accounting for a business com-
bination when the price paid by the acquiring company
exceeds the sum of the identifiable individual assets acquired
less liabilities assumed, based upon their fair values. The
excess is commonly referred to as goodwill. Goodwill may
arise from the acquisition of a company as a whole or a
portion thereof. Any costs for amortization, expensing,
write-off, or write-down of goodwill (however represented)
are unallowable.
31.205-50 Executive lobbying costs.
Costs incurred in attempting to improperly influence
(see FAR 3.401), either directly or indirectly, an
employee or officer of the executive branch of the
Federal Government to give consideration or to act regar-
ding a regulatory or contract matter are unallowable.
31.205-51 Costs of alcoholic beverages.
Costs of alcoholic beverages are unallowable.
SUBPART 31J—CONTRACTS WITH
EDUCATIONAL INSTITUTIONS
31.301 Purpose.
This subpart provides the principles for determining
the cost of research and development, training, and
other work performed by educational institutions under
contracts with the Government.
31.302 General.
Office of Management and Budget (OMB) Circu.
No. A-21. Cos: Principles for Educational Institutions,
revised, provides principles for determining the costs
applicable tc research and development, training, and
other work performed by educational institutions under
contracts with the Government.
,31303 Requirements.
; (a) Contracts that refer to this Subpart 31.3 for deter-
mining rallowabk costs under contracts with education-
al institutions: shall be deemed to refer to. and shall
have the allowability of costs determined by the con-
tracting officer in accordance with, the revision of
OMB Circular A-21 in effect on the date of the con-
tract.
(b) Agencies are not expected to place additional
restrictions on individual items of cost.
SUBPART 31.4—KtSLRVED
SUBPART 31.5—RESERVED
SUBPART 31.6—CONTRACTS WITH STATE,
LOCAL, AND FEDERALLY RECOGNIZED
INDIAN TRIBAL GOVERNMENTS
31.601	Purpose.
This subpart provides the principles for determining
allowable cost of contracts and subcontracts with Star
local, and federally recognized Indian tribal gove.
ments.
31.602	General.
Office of Management and Budget (OMB) Circular
No. A-87, Cost Principles for State and Local Govern-
ments, Revised, sets forth the principles for determin-
ing the allowable costs of contracts and subcontracts
with State, local, and federally recognized Indian tribal
governments. These principles are for cost determina-
tion and are not intended to identify the circumstances
or dictate the extent of Federal and State or local
panicipation in financing a particular contract.
31.603	Requirements.
(a)	Contracts that refer to this Subpart 31.6 for deter-
mining allowable costs under contracts with State,
local and Indian tribal governments shall be deemed to
refer to. and shall have the allowability of costs deter-
mined by the contracting officer in accordance with,
the revision of OMB Circular A-87 which is in effect
on the date of the contract.
(b)	Agencies are not expected to place additional
restrictions on individual items of cost.
SUBPART 31.7—CONTRACTS WITH NONPROFIT
ORGANIZATIONS
31.701 Purpose.
This* subpart provides the principles for determin
the cost applicable to work performed by nonpro.
organizations under contracts with the Government. A
nonprofit organization, for purpose of identification, is
defined as a business entity organized and operated
31-35
-------
31.702		j[0f u * 1;	
exclusively for charitable. scientific, or educational pur-
poses- of which no pan of the net earnings inure to the
bf of any private shareholder or individual, of
w j substantial part of the activities is carrying on
propaganda or otherwise attempting to influence legis-
lation or participating in any political campaign on
behalf of any candidate for public office, and which are-
exempt from federal income taxation under section 501'
of the Internal Revenue Code.
31.702 General.
Office of Management and Budget (OMB) Circular
No. A-122. Cost Principles for Nonprofit Organiza-
tions. sets forth principles for determining1 the costs
_FEDERAL ACQUISITION .REGULATION (FAR)
applicable to work performed by nonprof^organiza-
tions under contracts (also applies to gc^gts^and. otl^c;
agreements) with the Government.
31.703 Requirements.
(a) Contracts which refer to this Subpart. Jl^.TP'"
determining allowable costs shall ;berdeeijiedrtp.;r^fer
to. and shall have the allowability oncosts ;,de^^jined .
by the contracting officer in accor^^x? with,, ^le.reyi-
sion of OMB Circular. A-l^Jn^iefteOj on^fce^d^SjOf.
the contract. ;
1 (b) ^genries are hot.-^xpectecMj^,#!^?: ^additional:
restriciions on individual items QfjCGSVr
31-36
-------