Anyone authorizing the expenditure of federal funds needs to understand the cost principles contained in Circular A-21, published by the Federal Office of Management and Budget (OMB).

These principles govern costs that may be charged to the government by educational institutions either directly or indirectly.

The University of Rochester has implemented policies and issued guidelines on proper charging of costs, including the Implementation of Revisions to OMB Circular A-21 (December 27, 1993) that prohibits the direct charging of administrative costs to Federal awards. Generally, these same cost principles are applied to non-federal funding as well, although in some cases non-federal sponsors define allowable/unallowable costs differently than federal sponsors.

Any cost being charged to a sponsor must satisfy the following criteria:

1. The cost must be ALLOWABLE as defined by Circular A-21 and/or by the terms of your particular award (discussed further on the next page of this site).

2. The cost must be ALLOCABLE, that is, the project which paid the expense must benefit from it.

3. The expense must be REASONABLE, that is, the cost reflects what a "prudent person" might pay.

If costs are not allowable, allocable and reasonable, then they may NOT be charged to a sponsored project.

Prior to paying ANY cost, the University must assure that it is allowed by University policy. The University of Rochester does not allow reimbursement to individuals for costs incurred for:

• personal amusement, social activities, or entertainment (outside of activities directly related to University functions or purposes, including employee-employer relations, performance improvement, etc.);
• personal social or travel club dues;
• University parking permits for employees or students;
• traffic citations for either personal or University vehicles;
• personal services or personal purchases;
• interest charges incurred by individuals for late payment of their own personal bills;
• or any costs specifically disallowed by school or department policy.

Note that this prohibition applies to reimbursement of personal expenses. It does not mean that the University will not pay institutional expenses, e.g., interest charges on late payments of University bills.

OMB Circular A-21 also defines activities and costs as either ALLOWABLE or UNALLOWABLE for reimbursement by the Government. Costs that are identified as unallowable are NOT necessarily prohibited. In fact, unallowable costs may be essential University expenses for which you will be reimbursed. By identifying them as UNALLOWABLE, the Government has said that Federal funds may not be used to pay these expenses. They may NOT be charged either DIRECTLY or INDIRECTLY to the Government.

A-21 defines some ACTIVITIES as unallowable. Fund-raising, for example, although it is an essential University process, is an unallowable activity for Federal reimbursement. That means that Federal funds may not be used to pay ANY of the University's fund-raising expenses. In addition, A-21 also identifies some OBJECTS, i.e., specific types of costs, as

unallowable. Alcoholic beverages, for example, are an unallowable object. Regardless of the activity with which they are associated, the Federal Government will not reimburse their cost.

UNALLOWABLE costs may also be identified in the specific terms and conditions of sponsored projects. For example, if a sponsor specifies that international travel costs cannot be charged to a particular project, then those costs may NOT be charged to that project, even though A-21 allows them.

Another important distinction to be made when addressing costs charged to Ledger 5 Sponsored Program accounts pertains to unallowable costs versus excludable costs. Specifically, unallowable costs consist of charges that may NEVER be applied to a Ledger 5 Sponsored Program account. Excludable costs, however, may be charged to a Ledger 5 Sponsored Program account, but must be excluded when calculating the related overhead cost.

The University utilizes standard unallowable and excludable subcodes to collect charges that are allowed by the University under its policies and procedures, but are NOT allowed by the Federal government, and cannot therefore, be included in the University's indirect cost pools and F&A rate calculation. Consequently, it is imperative that expenditures charged to accounts included in the administration portion of the indirect cost pools are properly identified and coded within the University's accounting system.

The following is a listing of standard unallowable subcodes:

2019	Entertainment
2059	Alcoholic Beverages
2879	Goods & Services for Personal Use
2919	Other Unallowable Costs
2948	Individual Memberships & Dues
2941	Memberships (civic, community or social; country clubs)
2995	Unallowable Advertising

The following is a listing of standard excludable subcodes:

2600 - 2699	Capital Equipment Purchases
2931	Patient Care - Outpatient Charges
2939	Patient Care - Inpatient Charges
2967	Subcontracts - no indirect cost charges authorized
2969	Subcontracts > $ 25,000
4000 - 4999	Student Aid / Tuition
5215	Construction - Internal General Contractor
6100 - 6399	Debt Funding Provisions
8000 - 8999	Indirect Cost, Cost Sharing, Allocated Costs

In paying ANY expense, therefore, the University of Rochester tests the expenditure against its own policy. Then, if the expense is being charged to a sponsored project, we assure that the expense complies with the terms and conditions of the award, and that the applicable provisions of OMB Circular A-21 are met.

The University of Rochester's acceptance of gifts and sponsored projects brings with it the responsibility to be a prudent steward of the donor's or sponsor's funds. By accepting Government sponsored projects, we also accept the responsibility for stewardship of taxpayer's dollars. These responsibilities lead to audit scrutiny.

Any financial transaction at the University may be subject to review by both internal and external audit organizations, including:

• University of Rochester's Internal Audit Department
• sponsors and funding agencies,
• Bearing Point, LLP, the University of Rochester's certified public accounts, and the Department of Health and Human Services, the University's cognizant Government agency.

Since all University expenses are analyzed and sorted into pools to calculate the University's indirect costs, it is essential that ALL University of Rochester expenses be properly identified as either allowable or unallowable by means of the University's Chart of Accounts and Subsidiary Ledger Subcodes.

In addition, A-21 requires that costs be handled consistently across the University. This means, for example, that particular types of expenses may not be charged directly in one School or Department, and charged as an indirect cost somewhere else. The University of Rochester's policies and practices regarding the consistent treatment of costs have been established to meet the compliance standards set forth in OMB Circular A-21, Cost Principles for Educational Institutions, OMB Circular A-110, Uniform Administrative Requirements for Grants and Agreements with Institutions of Higher Education, and the Cost Accounting Standards (CAS) applicable to educational institutions. It is the responsibility of principal investigators, department heads and administrators to understand and comply with this guidance in order to prevent cost disallowances by the federal government. Consistent treatment of costs is necessary to meet the ultimate objective of CAS 502. The purpose of this standard is to require that each type of cost is allocated only once and on only one basis to any sponsored agreement or other cost objective. The criteria for determining the allocation of costs to a sponsored agreement or other cost objective should be the same for all similar objectives. Adherence to these cost accounting concepts is necessary to guard against the overcharging of some cost objectives and to prevent double counting. The ultimate key to consistency is the application of the University of Rochester policy. As long as you know and apply University policies, you do not need to be an expert on A-21. The University of Rochester employs experts to assure that policy guidance reflects regulatory requirements. Any questions pertaining to the correct charging of costs should be referred to the Office of Research and Project Administration (gliders@orpa.rochester.edu), or the Office of Research Accounting and Costing Standards, (mjlyke@finance.rochester.edu) (cmeiers@finance.rochester.edu).