Financial Management
Appendix E of HHS CFR Title 45, Part 74
Principles for Determining Costs Applicable to Research and Development
under Grants and Contracts with Hospitals
I. Purpose and Scope
A. Objectives. This appendix provides principles for determining the
costs applicable to research and development work performed by hospitals
under grants and contracts with the Department of Health and Human Services.
These principles are confined to the subject of cost determination and
make no attempt to identify the circumstances or dictate the extent of
hospital participation in the financing of a particular research or development
project. The principles are designed to provide recognition of the full
allocated costs of such research work under generally accepted accounting
principles. These principles will be applicable to both proprietary and
non-profit hospitals. No provision for profit or other increment above
cost is provided for in these principles. However, this is not to be
interpreted as precluding a negotiated fee between contracting parties
when a fee is appropriate.
B. Policy guides. The successful application
of these principles requires development of mutual understanding between
representatives of hospitals
and of the Department of Health and Human Services as to their scope,
applicability and interpretation. It is recognized that:
1. The arrangements
for hospital participation in the financing of a research and development
project are properly subject to negotiation
between the agency and the hospital concerned in accordance with such
Government-wide criteria as may be applicable.
2. Each hospital, possessing
its own unique combination of staff, facilities and experience, should
be encouraged to conduct research in a manner
consonant with its own institutional philosophies and objectives.
3.
Each hospital in the fulfillment of its contractual obligations should
be expected to employ sound management practices.
4. The application
of the principles established herein shall be in conformance with the
generally accepted accounting practices of hospitals.
5. Hospitals receive
reimbursements from the Federal Government for differing types of services
under various programs such as support of Research
and Development (including discrete clinical centers) Health Services
Projects, Medicare, etc. It is essential that consistent procedures for
determining reimbursable costs for similar services be employed without
regard to program differences. Therefore, both the direct and indirect
costs of research programs must be identified as a cost center(s) for
the cost finding and step-down requirements of the Medicare program,
or in its absence the Medicaid program.
C. Application. All operating
agencies within the Department of Health and Human Services that sponsor
research and development work in hospitals
will apply these principles and related policy guides in determining
the costs incurred for such work under grants and cost-reimbursement
type contracts and subcontracts. These principles will also be used as
a guide in the pricing of fixed-price contracts and subcontracts.
II. Definitions of Terms
A. Organized research means all research activities of a hospital that
may be identified whether the support for such research is from a federal,
non-federal or internal source.
B. Departmental research means research
activities that are not separately budgeted and accounted for. Such work,
which includes all research activities
not encompassed under the term organized research, is regarded for purposes
of this document as a part of the patient care activities of the hospital.
C. Research agreement means any valid arrangement to perform federally-sponsored
research or development including grants, cost-reimbursement type contracts,
cost-reimbursement type subcontracts, and fixed-price contracts and subcontracts.
D. Instruction and training means the formal or informal programs of
educating and training technical and professional health services personnel,
primarily medical and nursing training. This activity, if separately
budgeted or identifiable with specific costs, should be considered as
a cost objective for purposes of indirect cost allocations and the development
of patient care costs.
E. Other hospital activities means all organized
activities of a hospital not immediately related to the patient care,
research, and instructional
and training functions which produce identifiable revenue from the performance
of these activities. If a non-related activity does not produce identifiable
revenue, it may be necessary to allocate this expense using an appropriate
basis. In such a case, the activity may be included as an allocable cost
(See paragraph III D below.) Also included under this definition is any
category of cost treated as ``Unallowable,'' provided such category of
cost identifies a function or activity to which a portion of the institution's
indirect cost (as defined in paragraph V. A.) are properly allocable.
F. Patient care means those departments or cost centers which render
routine or ancillary services to in-patients and/or out-patients. As
used in paragraph IX B.23, it means the cost of these services applicable
to patients involved in research programs.
G. Allocation means the process
by which the indirect costs are assigned as between:
1. Organized research,
2. Patient care including departmental research.
3. Instruction and training, and
4. Other hospital activities.
H. Cost center means an identifiable department
or area (including research) within the hospital which has been assigned
an account number in the
hospital accounting system for the purpose of accumulating expense by
department or area.
I. Cost finding is the process of recasting the data
derived from the accounts ordinarily kept by a hospital to ascertain
costs of the various
types of services rendered. It is the determination of direct costs by
specific identification and the proration of indirect costs by allocation.
J. Step down is a cost finding method that recognizes that services
rendered by certain nonrevenue-producing departments or centers are utilized
by
certain other nonrevenue producing centers as well as by the revenue-producing
centers. All costs of nonrevenue-producing centers are allocated to all
centers which they serve, regardless of whether or not these centers
produce revenue. Following the apportionment of the cost of the nonrevenue-producing
center, that center will be considered closed and no further costs are
apportioned to that center.
K. Scatter bed is a bed assigned to a research
patient based on availability. Research patients occupying these beds
are not physically segregated
from nonresearch patients occupying beds. Scatter beds are geographically
dispersed among all the beds available for use in the hospital. There
are no special features attendant to a scatter bed that distinguishes
it from others that could just as well have been occupied.
L. Discrete
bed is a bed or beds that have been set aside for occupancy by research
patients and are physically segregated from other hospital
beds in an environment that permits an easily ascertainable allocation
of costs associated with the space they occupy and the services they
generate.
III. Basic Considerations
A. Composition of total costs. The cost of
a research agreement is comprised of the allowable direct costs incident
to its performance plus the allocable
portion of the allowable indirect costs of the hospital less applicable
credits. (See paragraph III - E.)
B. Factors affecting allowability of
costs. The tests of allowability of costs under these principles are:
1. They must be reasonable.
2. They must be assigned to research agreements under the standards and
methods provided herein.
3. They must be accorded consistent treatment through application of
those generally accepted accounting principles appropriate to the circumstances
(See paragraph I - E.5.) and
4. They must conform to any limitations or exclusions set forth in these
principles or in the research agreement as to types or amounts of cost
items.
C. Reasonable costs. A cost may be considered reasonable if the
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:
1. Whether or not the cost is of a type generally recognized
as necessary for the operation of the hospital or the performance of
the research
agreement,
2. The restraints or requirements imposed by such factors
as arm's length bargaining, federal and state laws and regulations,
and research agreement
terms and conditions,
3. Whether or not the individuals concerned
acted with due prudence in the circumstances, considering their responsibilities
to the hospital,
its patients, its employees, its students, the Government, and
the public
at large, and
4. The extent to which the actions taken with respect
to the incurrence of the cost are consistent with established hospital
policies and
practices applicable to the work of the hospital generally, including
Government
research.
D. Allocable costs.
1. A cost is allocable to a particular cost center
(i.e., a specific function, project, research agreement, department,
or the like) if the
goods or services involved are chargeable or assignable to such cost
center in accordance with relative benefits received or other equitable
relationship. Subject to the foregoing, a cost is allocable to a research
agreement if it is incurred solely to advance the work under the research
agreement; or it benefits both the research agreement and other work
of the hospital in proportions that can be approximated through use of
reasonable methods; or it is necessary to the overall operation of the
hospital and, in light of the standards provided in this chapter, is
deemed to be assignable in part to organized research. Where the purchase
of equipment or other capital items are specifically authorized under
a research agreement, the amounts thus authorized for such purchases
are allocable to the research agreement regardless of the use that may
subsequently be made of the equipment or other capital items involved.
2. Any costs allocable to a particular research agreement under the
standards provided in these principles may not be shifted to other research
agreements
in order to meet deficiencies caused by overruns or other fund considerations,
to avoid restrictions imposed by law or by terms of the research agreement,
or for other reasons of convenience.
E. Applicable credits.
1. The term applicable credits refers to those
receipts or negative expenditure types of transactions which operate
to offset or reduce expense items
that are allocable to research agreements as direct or indirect costs
as outlined in paragraph V - A. Typical examples of such transactions
are: purchase discounts, rebates, or allowances; recoveries or indemnities
on losses; sales of scrap or incidental services; tuition; adjustments
of overpayments or erroneous charges; and services rendered to patients
admitted to federally funded clinical research centers, primarily for
care though also participating in research protocols.
2. In some instances,
the amounts received from the Federal Government to finance hospital
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 hospital
in determining the rates or amounts to be charged to government research
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. Thus, where such items are provided for or
benefit
a particular hospital activity, i.e., patient care, research, instruction
and training, or other, they should be treated as an offset to the
indirect costs apportioned to that activity. Where the benefits are common
to
all hospital activities they should be treated as a credit to the total
indirect cost pool before allocation to the various cost objectives.
IV. Direct Costs
A. General. Direct costs are those that can be identified
specifically with a particular cost center. For this purpose, the term
cost center
refers not only to the ultimate centers against which costs are finally
lodged such as research agreements, but also to other established
cost centers such as the individual accounts for recording particular
objects
or items of expense, and the separate account groupings designed
to record the expenses incurred by individual organizational units,
functions,
projects and the like. In general, the administrative functions and
service activities described in paragraph VI are identifiable as
separate cost
centers, and the expenses associated with such centers become eligible
in due course for distribution as indirect costs of research agreements
and other ultimate cost centers.
B. Application to research agreements.
Identifiable benefit to the research work rather than the nature of
the goods and services involved
is the
determining factor in distinguishing direct from indirect costs
of research agreements. Typical of transactions chargeable to a research
agreement
as direct costs are the compensation of employees for the time
or
effort devoted to the performance of work under the research agreement,
including
related staff benefit and pension plan costs to the extent that
such items are consistently accorded to all employees and treated by
the
hospital as direct rather than indirect costs (see paragraph V.
B4b); the costs
of materials consumed or expended in the performance of such work;
and other items of expense incurred for the research agreement,
such as 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 research agreements provided
such
items are consistently treated by the institution as direct rather
than indirect costs and are charged under a recognized method of
costing or
pricing designed to recover only the actual direct and indirect
costs of such material or service and conforming to generally accepted
cost accounting practices consistently followed by the institution.
V. Indirect
Costs
A. General. Indirect costs are those that have been incurred for
common or joint objectives, and thus are not readily subject to treatment
as
direct costs of research agreements or other ultimate or revenue producing
cost centers. In hospitals such costs normally are classified but not
necessarily restricted to the following functional categories: Depreciation;
Administrative and General (including fringe benefits if not charged
directly); Operation of Plant; Maintenance of Plant; Laundry and Linen
Service; Housekeeping; Dietary; Maintenance of Personnel; and Medical
Records and Library.
B. Criteria for distribution --
1. Base period. A base period for distribution
of indirect costs is the period during which such costs are incurred
and accumulated for distribution
to work performed within that period. The base period normally should
coincide with the fiscal year established by the hospital, but in any
event the base period should be so selected as to avoid inequities
in the distribution of costs.
2. Need for cost groupings. The overall
objective of the allocation process
is to distribute the indirect costs described in paragraph VI to
organized research, patient care, instruction and training, and other
hospital
activities in reasonable proportions consistent with the nature and
extent of the use of the hospital's resources by research personnel,
medical
staff, patients, students, and other personnel or organizations.
In order to achieve this objective with reasonable precision, it may
be
necessary
to provide for selective distribution by establishing separate groupings
of cost within one or more of the functional categories of indirect
costs referred to in paragraph V - A. In general, the cost groupings
established
within a functional category should constitute, in each case, a pool
of those items of expense that are considered to be of like character
in terms of their relative contribution to (or degree of remoteness
from) the particular cost centers to which distribution is appropriate.
Each
such pool or cost grouping should then be distributed individually
to the related cost centers, using the distribution base or method
most
appropriate in the light of the guides set out in B3 below. While
this paragraph places primary emphasis on a step-down method of indirect
cost computation, paragraph VIII provides an alternate method which
may be
used under certain conditions.
3. Selection of distribution method.
Actual conditions must be taken into account in selecting the method
or base to be used in distributing
to related cost centers the expenses assembled under each of the
individual cost groups established as indicated under B2 above.
Where a distribution
can be made by assignment of a cost grouping directly to the area
benefited, the distribution should be made in that manner. Care
should be given,
however, to eliminate similar or duplicative costs from any other
distribution made to this area. Where the expenses under a cost
grouping are more
general in nature, the distribution to related cost centers should
be made through use of a selected base which will produce results
which
are equitable to both the Government and the hospital. In general,
any cost element or cost-related factor associated with the hospital's
work
is potentially adaptable for use as a distribution base provided:
a. It can readily be expressed in terms of dollars or other quantitative
measure (total direct expenditures, direct salaries, manhours applied,
square feet utilized, hours of usage, number of documents processed,
population served, and the like); and
b. It is common to the related cost centers during the base period.
The essential consideration in selection of the distribution base
in each
instance is that it be the one best suited for assigning the pool
of costs to related cost centers in accord with the relative benefits
derived;
the traceable cause and effect relationship; or logic and reason,
where neither benefit nor cause and effect relationship is determinable.
4. General consideration on cost groupings. The extent to which separate
cost groupings and selective distribution would be appropriate
at
a hospital 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 groups (based on account classification or analysis)
within
a functional category include but are not limited to the following:
a. Where certain items or categories of expense relate solely to
one of the major divisions of the hospital (patient care,
sponsored
research,
instruction and training, or other hospital activities) or
to any two but not all, such expenses should be set aside as a separate
cost grouping
for direct assignment or selective distribution in accordance
with
the guides provided in B2 and B3 above.
b. Where any types
of expense ordinary treated as indirect cost as outlined in paragraph
V - A are charged to research
agreements
as
direct costs,
the similar type expenses applicable to other activities
of the institution must through separate cost grouping be excluded
from
the indirect
costs allocable to research agreements.
c. 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 to organized research and other hospital activities.
d.
Where organized activities (including identifiable segments of
organized research as well as the activities
cited in
paragraph II
- E) provide
their own purchasing, personnel administration, building
maintenance, or housekeeping or similar service, the
distribution of such
elements of indirect cost to such activities should
be accomplished through
cost grouping which includes only that portion of central
indirect costs (such
as for overall management) which are properly allocable
to such activities.
e. Where the hospital elects to
treat as indirect charges the costs of pension plans and other
staff benefits,
such costs
should be
set aside
as a separate cost grouping for selective distribution
to related cost centers, including organized research.
f. Where the hospital is affiliated with a medical school or some
other institution which performs organized
research
on
the hospital's
premises,
every effort should be made to establish separate
cost groupings in the Administrative and General
or other
applicable category
which will reasonably
reflect the use of services and facilities by such
research. (See also paragraph VII - A.3)
5. Materiality. Where it is
determined that the use of separate cost groupings and selective
distribution are necessary to
produce equitable
results, the number of such separate cost groupings within
a functional 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.
C. Administration of
limitations on allowances for indirect costs.
1. Research grants may
be subject to laws and/or administrative regulations that limit the allowance
for indirect costs under each such grant to
a stated percentage of the direct costs allowed. Agencies that sponsor
such grants will establish procedures which will assure that:
a. The terms and amount authorized in each case conform with the
provisions of paragraphs III, V and IX of these principles as they
apply to matters
involving the consistent treatment and allowability of individual
items of cost; and
b. The amount actually allowed for indirect costs
under each such research grant does not exceed the maximum allowable
under the limitation or the
amount otherwise allowable under these principles, whichever is
the smaller.
2. Where the actual allowance for indirect costs on any research grant
must be restricted to the smaller of the two alternative amounts referred
to in C1 above, such alternative amounts should be determined in accordance
with the following guides:
a. The maximum allowable under the limitation
should be established by applying the stated percentage to a direct
cost base which shall include
all items of expenditure authorized by the sponsoring agency for
inclusion as part of the total cost for the direct benefit of the
work under
the grant; and
b. The amount otherwise allowable under these principles
should be established by applying the current institutional indirect
cost rate
to those elements
of direct cost which were included in the base on which the rate
was computed.
3. When the maximum amount allowable under a statutory limitation
or the terms of a research agreement is less than the amount otherwise
allocable
as indirect costs under these principles, the amount not recoverable
as indirect costs under the research agreement involved may not be
shifted to other research agreements.
VI. Identification and Assignment of Indirect
Costs
A. Depreciation or use charge.
1. The expenses under this heading should
include depreciation (as defined in paragraph IX - B.9a) on buildings,
fixed equipment, and movable equipment,
except to the extent purchased through federal funds. Where adequate
records for the recording of depreciation are not available, a use
charge may be substituted for depreciation (See paragraph IX - B.)
2. The expenses included in this category should be allocated to applicable
cost centers in a manner consistent with the guides set forth in
paragraph V - B, on a basis that gives primary emphasis to (a) space
utilization
with respect to depreciation on buildings and fixed equipment; and
(b)
specific identification of assets and their use with respect to movable
equipment as it relates to patient care, organized research, instruction
and training, and other hospital activities. Where such records are
not sufficient for the purpose of the foregoing, reasonable estimates
will
suffice as a means for effecting distribution of the amounts involved.
B. Administration and general expenses.
1. The expenses under this heading
are those that have been incurred for the administrative offices
of the hospital including accounting,
personnel, purchasing, information centers, telephone expense, and
the like which do not relate solely to any major division of the institution,
i.e., solely to patient care, organized research, instruction and
training, or other hospital activities.
2. The expenses included in
this category may be allocated on the basis
of total expenditures exclusive of capital expenditures, or salaries
and wages in situations where the results of the distribution made
on this basis are deemed to be equitable both to the Government
and the
hospital; otherwise the distribution of Administration and General
expenses should be made through use of selected bases, applied
to separate cost
groupings established within this category of expenses in accordance
with the guides set out in paragraph V - B.
C. Operation of plant.
1. 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, and provision of utilities (exclusive
of telephone expense) and protective services to the physical plant.
They
include expenses incurred for such items as power plant operations,
general utility costs, elevator operations, protection services, and
general
parking lots.
2. The expenses included in this category should be
allocated to applicable cost centers in a manner consistent with
the guides provided in paragraph
V - B, on a basis that gives primary emphasis to space utilization.
The allocations should be developed as follows:
a. Where actual
space and related cost records are available or can readily be
developed and maintained without significant change
in the
accounting
practices, the amount distributed should be based on such records;
b. Where the space and related cost records maintained are not sufficient
for purposes of the foregoing, a reasonable estimate
of the proportion
of total space assigned to the various costs centers normally
will suffice as a means for effecting distribution of the
amounts involved;
or
c. Where it can be demonstrated that an area or volume
or space basis of allocation is impractical or inequitable,
other bases
may be used
provided consideration is given to the use of facilities
by research personnel and others, including patients.
D. Maintenance of plant.
1. The expenses under this heading should
include:
a. All salaries and wages pertaining to ordinary repair and
maintenance work performed by employees on the payroll of the hospital;
b. All supplies and parts used in the ordinary repairing and maintaining
of buildings and general equipment; and
c. Amounts paid to outside
concerns for the ordinary repairing and maintaining of buildings
and general equipment.
2. The expenses included
in this category should be allocated to applicable
cost centers in a manner consistent with the guides provided in paragraph
V - B. on a basis that gives primary emphasis to space utilization.
The allocations and apportionments should be developed as follows:
a. Where actual space and related cost records are available and
can readily be developed and maintained without significant change
in the
accounting practices, the amount distributed should be based
on
such records;
b. Where the space and related cost records maintained
are not sufficient for purposes of the foregoing, a reasonable
estimate of the proportion
of total space assigned to the various cost centers normally
will
suffice as a means for effecting distribution of the amounts
involved; or
c. Where it can be demonstrated that an area or volume
of space basis of allocation is impractical or inequitable, other
basis
may be used
provided consideration is given to the use of facilities
by research personnel and others, including patients.
E. Laundry and linen.
1. The expenses under this heading should include:
a. Salaries and wages
of laundry department employees, seamstresses, clean linen handlers,
linen delivery men, etc.;
b. Supplies used in connection with the
laundry operation and all linens purchased; and
c. Amounts paid
to outside concerns for purchased laundry and/or linen service.
2. The expense included in this category should be allocated
to related cost centers in a manner consistent with the guides provided
in paragraph
V - B. on a basis that gives primary emphasis to actual pounds of
linen used. The allocations should be developed as follows:
a. Where
actual poundage and related cost records are available or
can readily be developed and maintained without significant change
in the
accounting practices, the amount distributed should be based
on such records;
b. Where it can be demonstrated that a poundage
basis of allocation
is impractical or inequitable other bases may be used provided
consideration is given to the use of linen by research personnel
and others, including
patients.
F. Housekeeping.
1. The expenses under this heading should include:
a. All salaries
and wages of the department head, foreman, maids, porters, janitors,
wall washers, and other housekeeping employees;
b. All supplies
used in carrying out the housekeeping functions; and
c. Amounts
paid to outside concerns for purchased services such as window
washing, insect extermination, etc.
2. The expenses included in this
category should be allocated to related cost centers in a manner consistent
with the guides provided in paragraph
V - B. on a basis that gives primary emphasis to space actually serviced
by the housekeeping department. The allocations and apportionments
should be developed as follows:
a. Where actual space serviced and
related cost records are available
or can readily be developed and maintained without significant
change in the accounting practices, the amount distributed should
be based
on such records;
b. Where the space serviced and related cost records
maintained are not sufficient for purposes of the foregoing, a
reasonable estimate
of the
proportion of total space assigned to the various cost centers
normally will suffice as a means for effecting distribution of
the amounts
of housekeeping expenses involved; or
c. Where it can be demonstrated
that the space serviced basis of allocation is impractical or inequitable,
other bases may
be used
provided consideration
is given to the use of housekeeping services by research personnel
and others, including patients.
G. Dietary.
1. These expenses, as used herein, shall mean only the subsidy
provided by the hospital to its employees including research personnel
through
its cafeteria operation. The hospital must be able to demonstrate through
the use of proper cost accounting techniques that the cafeteria operates
at a loss to the benefit of employees.
2. The reasonable operating loss
of a subsidized cafeteria operation should be allocated to related
cost centers in a manner consistent with
the guides provided in paragraph V - B. on a basis that gives primary
emphasis to number of employees.
H. Maintenance (housing) of personnel.
1. The expenses under this heading
should include:
a. The salaries and wages of matrons, clerks, and other
employees engaged in work in nurses' residences and other employees'
quarters;
b. All supplies used in connection with the operation of
such dormitories; and
c. Payments to outside agencies for the rental
of houses, apartments, or rooms used by hospital personnel.
2. The expenses included in
this category should be allocated to related cost centers in a manner
consistent with the guides provided
in paragraph
V - B. on a basis that gives primary emphasis to employee utilization
of housing facilities. The allocation should be developed as
follows:
a. Appropriate credit should be given for all payments received
from employees or otherwise to reduce the expense to be allocated;
b. A net cost per housed employee may then be computed; and
c. Allocation
should be made on a departmental basis based on the number of housed
employees in each respective department.
I. Medical
records and library.
1. The expenses under this heading should include:
a. The salaries and
wages of the records librarian, medical librarian, clerks, stenographers,
etc.; and
b. All supplies such as medical record forms, chart covers,
filing supplies, stationery, medical library books, periodicals, etc.
2. The expenses included in this category should be allocated to related
cost centers in a manner consistent with the guides
provided
in paragraph
V - B. on a basis that gives primary emphasis to a special
time survey of medical records personnel. If this appears to be impractical
or
inequitable, other bases may be used provided consideration
is
given to the use of
these facilities by research personnel and others, including
patients.
VII. Determination and Application of Indirect Cost Rate or Rates
A.
Indirect cost pools.
1. Subject to (2) below, indirect costs allocated
to organized research should be treated as a common pool, and the costs
in such common pool
should be distributed to individual research agreements benefiting
therefrom on a single rate basis.
2. In some instances a single rate
basis for use on all government research at a hospital may not be
appropriate since it would not
take into account
those different environmental factors which may affect substantially
the indirect costs applicable to a particular segment of government
research at the institution. For this purpose, a particular segment
of government
research may be that performed under a single research agreement
or it may consist of research under a group of research 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 government research
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. An example of this
differential may
be in the development of a separate indirect cost pool for a
clinical research center grant. The separate indirect cost pool should
be
developed
during the course of the regular distribution process, and the
separate indirect cost rate resulting therefrom should be utilized
provided it is determined that:
a. Such indirect cost rate differs
significantly from that which
would have obtained under (1) above; and
b. The volume of
research work to which such rate would apply is material in relation
to other government research at the
institution.
3. It is a common practice for grants or contracts awarded to other
institutions, typically University Schools of Medicine, to
be performed on hospital
premises. In these cases the hospital should develop a separate
indirect cost pool applicable to the work under such grants
or contracts.
This pool should be developed by a selective distribution of
only those
indirect cost categories which benefit the work performed by
the other institution,
within the practical limits dictated by available data and
the materiality of the amounts involved. Hospital costs determined
to be allocable
to grants or contracts awarded to another institution may not
be recovered as a cost of grants or contracts awarded directly to
the hospital.
B. The distribution base. Preferably, indirect costs allocated
to organized research should be distributed to applicable research
agreements on
the basis of direct salaries and wages. However, where the use
of salaries and wages results in an inequitable allocation of costs
to the research
agreements, total direct costs or a variation thereof, may be used
in
lieu of salaries and wages. Regardless of the base used, an indirect
cost rate should be determined for each of the separate indirect
cost pools developed pursuant to paragraph VII - A. The rate in
each case
should be stated as the percentage which the amount of the particular
indirect cost pool is of the total direct salaries and wages (or
other base selected) for all research agreements identified with
such a pool.
C. Negotiated lump sum for overhead. A negotiated
fixed amount in lieu of indirect costs may be appropriate for self-contained
or off-campus
research activities where the benefits derived from a hospital's
indirect
services cannot be readily determined. Such amount negotiated
in lieu of indirect costs will be treated as an offset to the appropriate
indirect
cost pool after allocation to patient care, organized research,
instruction and training, and other hospital activities. The
base
on which such
remaining expenses are allocated should be appropriately adjusted.
D. Predetermined overhead rates. The utilization of predetermined fixed
overhead rates may offer potential advantages in the administration
of research agreements by facilitating the preparation of research
budgets
and permitting more expeditious close out of the agreements
when the
work is completed. Therefore, to the extent allowed by law,
consideration may be given to the negotiation of predetermined fixed
rates
in those situations where the cost experience and other pertinent
factors
available are deemed sufficient to enable the Government and
the
hospital to
reach a reasonable conclusion as to the probable level of the
indirect cost
rate for the ensuing accounting period.
VIII. Simplified Method
for Small Institutions
A. General.
1. Where the total direct cost of all government-sponsored
research and development work at a hospital in a
year is minimal, the
use of the abbreviated
procedure described in paragraph VIII - B below may
be acceptable in the determination of allowable indirect costs. This
method may also
be used to initially determine a provisional indirect
cost rate for hospitals
that have not previously established a rate. Under
this abbreviated
procedure, data taken directly from the institution's
most recent annual financial
report and immediately available supporting information
will be utilized as a basis for determining the indirect cost
rate applicable
to research
agreements at the institution.
2. The rigid formula
approach provided under the abbreviated procedure has limitations
which may preclude its use
at some hospitals either
because the minimum data required for this purpose
are not readily available
or because the application of the abbreviated procedure
to the available data produces results which appear
inequitable to the
Government
or the hospital. In any such case, indirect costs
should be determined through
use of the regular procedure rather than the abbreviated
procedure.
3. In certain instances where the total
direct cost of all government-sponsored research and development
work
at the
hospital is more than minimal,
the abbreviated procedure may be used if prior
permission
is obtained. This
alternative will be granted only in those cases
where it can be demonstrated that the step-down
technique
cannot be followed.
B. Abbreviated procedure.
1. Total expenditures as taken from the most
recent annual financial report will be adjusted by eliminating
from
further consideration
expenditures for capital items as defined in
paragraph IX - B.4 and unallowable
costs as defined under various headings in paragraph
IX and paragraph III -
E.
2. Total expenditures as adjusted under the
foregoing will then be distributed among (a) expenditures
applicable to
administrative and
general overhead
functions, (b) expenditures applicable to all
other overhead functions, and (c) expenditures for all
other purposes.
The first
group shall
include amounts associated with the functional
categories, Administration and
General, and Dietary, as defined in paragraph
VI. The second group shall include Depreciation, Operation
of Plant, Maintenance
of
Plant, and Housekeeping.
The third group -- expenditures for all other
purposes -- shall include the amounts applicable to all
other activities, namely,
patient care,
organized research, instruction and training,
and other
hospital
activities as defined under paragraph II -
E. For the purposes of this section,
the functional categories of Laundry and Linen,
Maintenance of Personnel, and Medical Records
and Library as
defined in paragraph
VI shall
be considered as expenditures for all other
purposes.
3. The expenditures distributed to the first
two groups in paragraph VIII - B.2 should
then be adjusted
by
those receipts
or negative
expenditure types of transactions which tend
to reduce expense items allocable
to research agreements as indirect costs.
Examples of such receipts or negative
expenditures are itemized in paragraph III
- E.1.
4. In applying the procedures in paragraphs
VIII - B.1 and B.2, the cost of unallowable
activities
such
as Gift
Shop,
Investment
Property
Management,
Fund Raising, and Public Relations, when
they benefit from the hospital's indirect
cost services,
should
be treated
as expenditures
for all
other purposes. Such activities are presumed
to benefit from the hospital's
indirect cost services when they include
salaries of personnel working in the hospital.
When
they do not
include such
salaries, they should
be eliminated from the indirect cost rate
computation.
5. The indirect cost rate
will then be computed in two stages. The first stage
requires the
computation of an
Administrative
and General
rate
component. This is done by applying a
ratio of research
direct costs over total direct costs
to the Administrative and General
pool developed
under paragraphs VIII - B.2 and B.3 above.
The resultant amount -- that which is
allocable to
research --
is divided by the
direct research
cost
base. The second stage requires the computation
of an All Other Indirect Cost rate component.
This is
done
by applying
a ratio
of research
direct space over total direct space
to All Other Indirect Cost pool developed
under paragraphs VIII - B.2 and B.3 above.
The resultant amount -- that which is
allocable to
research --
is divided by the
direct research
cost
base.
The total of the two rate components
will be the institution's indirect cost
rate.
For the
purposes
of this section,
the research direct
cost or space and total direct cost or
space will be that cost or space
identified with the functional categories
classified under Expenditures for all
other purposes under paragraph VIII - B.2.
IX.
General Standards for Selected Items of Cost
A. General. This section
provides standards to be applied in establishing the allowability of
certain
items involved
in
determining cost.
These standards 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 in the standards
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
or standards provided for similar or related items
of cost. In case
of discrepancy between
the
provisions of a specific research agreement
and the applicable standards provided, the provisions
of
the research agreement
should govern.
However, in some cases advance understandings
should be reached on particular
cost items in order that the full costs of
research be supported. The extent of allowability of the
selected items of cost
covered in this
section has been stated to apply broadly to
many accounting systems
in varying environmental situations. Thus,
as to any given research agreement,
the reasonableness and allocability of certain
items of costs may be difficult to determine,
particularly in connection
with hospitals
which
have medical school or other affiliations.
In order to
avoid
possible subsequent disallowance or dispute
based on unreasonableness or
nonallocability, it is important that prospective
recipients of federal funds particularly
those whose work is predominantly or substantially
with the Government, seek agreement with the
Government in
advance of the incurrence
of special or unusual costs in categories where
reasonableness
or allocability
are
difficult to determine. Such agreement may
also be initiated by the Government. Any such agreement
should
be incorporated
in the
research
agreement itself.
However, the absence of such an advance agreement
on any element of cost will not in itself serve
to make
that element
either
allowable or unallowable.
Examples of costs on which advance agreements
may be particularly important
are:
1. Facilities costs, such as;
a. Depreciation
b. Rental
c. Use charges for fully depreciated assets
d. Idle facilities and idle capacity
e. Plant reconversion
f. Extraordinary or deferred maintenance
and repair
g. Acquisition of automatic data processing
equipment.
2. Preaward costs
3. Non-hospital professional activities
4. Self-insurance
5. Support services charged directly (computer
services, printing and duplicating
services, etc.)
6. Employee compensation, travel,
and other personnel costs, including;
a. Compensation for personal service, including wages and
salaries, bonuses
and incentives,
premium payments,
pay
for time not
worked, and supplementary
compensation and benefits,
such as pension and retirement, group
insurance,
severance
pay plans,
and other forms
of compensation
b. Morale,
health, welfare, and food service and dormitory
costs
c. Training and
education costs
d. Relocation costs,
including special or
mass personnel movement
B. Selected
items --
1. Advertising costs. 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.
The only advertising
costs
allowable are those
which are
solely for;
a. The recruitment of persons
required for the performance by the institution
of obligations
arising under the
research agreement,
when considered
in conjunction with all other
recruitment costs as set forth in
paragraph IX - B.34.
b. The procurement
of scarce items for the performance of the research
agreement;
or
c. The disposal of scrap
or surplus materials acquired
in the performance
of the research
agreement. Costs
of this
nature,
if incurred for
more than one research agreement
or for both research agreement
work and
other work of the institution,
are allowable
to the extent that the principles
in paragraphs IV and V are
observed.
2. Bad debts. Losses arising from uncollectible accounts and other
claims and related
collection and legal
costs are unallowable
except
that a
bad debt may be included as a
direct cost of the research agreement
to the extent
that it
is caused
by a research
patient and approved
by the
awarding agency. This inclusion
is only intended to cover the situation
of the
patient admitted
for research
purposes
who
subsequently or in conjunction
with the research receives clinical care
for
which
a charge
is made to the patient. If, after
exhausting all means of collecting
these charges,
a bad debt results,
it
may be considered
an
appropriate charge to the research
agreement.
3. 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 hospital. They arise
also in instances where the hospital
requires similar assurance.
Included are such types as
bid, performance, payment,
advance payment,
infringement,
and fidelity bonds.
b.
Costs of bonding required pursuant to the terms of
the research agreement
are
allowable.
c. Costs of
bonding required by the hospital 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 reasonable
under
the circumstances.
4. Capital
expenditures. The costs of equipment, buildings,
and repairs
which
materially
increase the value or
useful life of
buildings or
equipment should be capitalized
and are unallowable except
as provided for in
the research agreement.
5.
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, fire-fighting
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
elsewhere.
Costs of local
civil defense projects
not on the institution's premises
are unallowable.
6. Communication
costs. Costs incurred
for telephone
services,
local and
long distance
telephone calls,
telegrams, radiograms,
postage,
and the like are allowable.
7. Compensation for personal services --
a. General. Compensation
for personal services
covers all
remuneration
paid currently
or accrued to employees
of
the hospital for
services rendered
during the period of performance
under
government
research agreements.
Such remuneration
includes salaries, wages, staff
benefits (see paragraph
IX - B.10),
and pension
plan costs (see
paragraph IX
- B.25). The
costs of such remuneration
are allowable to
the extent that the
total compensation
to individual employees
is
reasonable for
the services rendered
and conforms to the established
policy
of the institution
consistently applied,
and provided that
the charges
for work performed
directly on government
research agreements
and for other
work allocable
as indirect
costs to sponsored
research are determined
and supported as
hereinafter provided. For
non-profit, non-proprietary
institutions, where
federally supported programs
constitute less
than a preponderance
of the activity
at
the institution
the primary test of reasonableness
will be to require
that the institution's
compensation
policies be applied
consistently both
to federally-sponsored
and non-sponsored
activities alike. However,
where
special circumstances
so dictate a contractual
clause
may be
utilized which
calls for application of
the test of
comparability in
determining the reasonableness
of compensation.
b.
Payroll distribution.
Amounts charged
to organized
research for personal
services, regardless
of
whether treated
as
direct costs
or allocated
as indirect costs,
will be based
on hospital payrolls
which have
been approved
and
documented in
accordance with generally
accepted
hospital
practices. In
order to
develop
necessary direct
and indirect
allocations of
cost, supplementary
data
on time or effort
as provided in
paragraph (c)
below, normally
need be required
only
for
individuals whose
compensation
is properly chargeable
to two
or more research
agreements or
to two
or more of the
following broad
functional categories:
(1) Patient care;
(2) organized
research; (3)
instruction and training;
(4) indirect
activities as defined in paragraph
V - A; or (5)
other hospital activities
as
defined
in paragraph
II - E.
c. Reporting
time or effort.
Charges
for
salaries and
wages of individuals
other
than members
of the professional
staff
will
be supported
by daily time
and attendance
and payroll
distribution records.
For members
of the professional
staff, current
and
reasonable
estimates of the percentage
distribution
of their total
effort
may be used
as
support in
the absence of actual
time records.
The term professional
staff
for purposes
of
this section
includes physicians,
research
associates,
and other personnel
performing
work at responsible
levels of
activities.
These personnel normally
fulfill duties,
the
competent performance
of which usually
requires
persons possessing
degrees from
accredited
institutions
of higher
learning and/or
state licensure.
In order to
qualify as current
and reasonable,
estimates must
be made
no later than
one month (though
not
necessarily
a calendar
month) after
the month
in which the
services were
performed.
d.
Preparation
of estimates
of effort.
Where required
under paragraph
(c)
above, estimates
of effort
spent by
a member of the
professional
staff on
each research agreement
should
be prepared
by
the individual
who performed
the services
or by a responsible
individual
such as a
department head
or supervisor
having first-hand
knowledge
of the services
performed
on each research
agreement.
Estimates
must show
the allocation
of effort
between organized
research
and
all other
hospital activities
in
terms of
the percentage
of
total effort
devoted to
each of the
broad
functional
categories
referred
to in
(b) above.
The
estimate
of effort spent
on
a research
agreement
may
include a
reasonable
amount of
time spent in activities
contributing
and
intimately
related
to work under
the agreement,
such as preparing
and delivering
special lectures
about
specific
aspects of
the ongoing
research,
writing research
reports and
articles,
participating
in
appropriate
research
seminars, consulting
with colleagues
with
respect to
related
research,
and attending appropriate
scientific
meetings
and conferences.
The term
``all other
hospital
activities''
would
include
departmental
research,
administration, committee
work,
and public
services
undertaken
on behalf
of the
hospital.
e.
Application
of budget
estimates.
Estimates
determined
before
the performance
of
services,
such as
budget estimates
on a
monthly,
quarterly,
or yearly
basis do
not
qualify
as estimates
of effort
spent.
f. Non-hospital professional
activities.
A hospital
must
not alter or
waive
hospital-wide policies
and practices
dealing
with
the permissible
extent
of
professional
services
over
and above
those
traditionally
performed
without
extra
hospital compensation,
unless
such
arrangements are specifically
authorized
by
the sponsoring
agency.
Where
hospital-wide policies
do not
adequately
define
the
permissible
extent
of
consultantships
or other
non-hospital
activities
undertaken
for extra
pay,
the Government
may
require
that
the effort
of professional
staff
working
under
research agreements
be allocated
as between
(1)
hospital
activities,
and
(2) non-hospital
professional
activities.
If
the sponsoring
agency
should
consider
the
extent
of
non-hospital
professional
effort
excessive,
appropriate
arrangements
governing
compensation
will
be negotiated
on a
case by case
basis.
g.
Salary
rates
for
part-time appointments.
Charges
for
work performed
on
government research
by
staff
members
having
only
part-time
appointments
will
be
determined
at
a rate
not
in excess
of
that
for
which
he
is
regularly paid
for
his part-time
staff
assignment.
8.
Contingency provisions. Contributions to a
contingency reserve
or any
similar provisions
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.
9. Depreciation
and use allowances.
a. Hospitals may be compensated
for the
use of buildings,
capital improvements
and usable
equipment
on hand
through depreciation
or use allowances.
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 has reference
to the prospective
period of economic
usefulness
in the
particular
hospital's
operations as distinguished
from
physical
life. Use allowances
are the
means of allowing
compensation
when depreciation or
other equivalent
costs are not
considered.
b.
Due consideration
will be given
to government-furnished
research
facilities
utilized
by the institution
when
computing
use allowances
and/or depreciation
if the government-furnished
research
facilities are material
in amount.
Computation
of
the use allowance
and/or depreciation
will
exclude
both the
cost or
any portion
of
the cost
of grounds,
buildings
and equipment borne
by or donated
by the
Federal
Government,
irrespective
of
where title
was originally
vested or
where
it
presently
resides, and secondly,
the cost
of grounds.
Capital expenditures
for land
improvements (paved areas,
fences, streets,
sidewalks,
utility conduits,
and similar
improvements
not already
included
in the cost of
buildings)
are allowable
provided
the systematic
amortization
of such capital
expenditures
has been
provided
in the
institution's
books of
accounts, based
on reasonable
determinations
of the probable
useful
lives of
the individual
items involved,
and the
share allocated
to organized
research
is developed
from the
amount thus
amortized
for the
base period
involved.
c.
Normal
depreciation on a hospital's
plant,
equipment, and other
capital
facilities, except
as excluded
by (d)
below,
is an allowable
element
of research
cost provided
that
the amount
thereof
is computed:
1. Upon
the
property cost
basis used
by
the hospital
for
Federal Income
Tax
purposes (See
section 167 of
the
|
