OMB Circular A-21 requires that Universities comply with a certain regulations, including these four Cost Accounting Standards:

• CAS 501 - Consistency in Estimating, Accumulating and Reporting Costs - This standard requires that costs be estimated, accumulated, and reported consistently. A cost that is included in a contract or grant proposal as a direct cost must be accumulated as a direct charge in the accounting records. The same rule applies to indirect charges.
• CAS 502 - Consistency in Allocating Costs Incurred for the Same Purpose - This standard requires that costs incurred for the same purpose be accounted for in the same manner. A department cannot account for such costs in one manner while another department accounts for them differently. Therefore, this standard requires that the University have established cost accounting practices that are applied consistently throughout the campus.
• CAS 505 - Accounting for Unallowable Costs - This standard requires that unallowable costs be identified and excluded from any costs charged to federal contracts and grants.
• CAS 506 - Cost Accounting Period - This standard requires that the University's cost accounting period be the same as the University's fiscal year.

Direct, indirect and allowable costs shall be consistently estimated, charged, accumulated, and reported in compliance with federal cost principles and the University’s cost accounting standards.

Unallowable costs and double charging may occur on sponsored agreements if University cost accounting practices are not consistently followed. Financial penalties, expenditure disallowances, and harm to the University's reputation may result.

This policy applies to all employees, including administrators, staff, faculty, and student employees, who manage, supervise, or conduct University business or financial transactions or activities. This policy applies to all sponsored agreements, federal and non-federal. However, the Cost Policy on Sponsored Agreements costs identified as “normally indirect” (Appendix A) may be directly charged to a non-federal project if permitted by the sponsor’s policy or otherwise approved by the sponsor. For this purpose a federal sponsored agreement includes federal awards received directly by the University as well as subawards received by the University under federal awards to other organizations.  Federal formula grants such as Hatch, McIntire-Stennis, Multi-State, Animal Health, and Smith Lever are subject to this policy.

All University personnel are expected to be aware of and comply with this University policy including, without limitation, the principles and policies listed below. Confirmed violations may result in disciplinary action. In some instances, civil claims and criminal charges may also result. Procedures for the investigation of suspected violations, imposition of disciplinary action, and the availability of grievance or appeal channels shall be governed by otherwise applicable University policies, handbooks, and collective bargaining agreements.

OMB A-21 Circular Cost Principles for Higher Education - The University of Vermont follows the cost principles outlined in OMB Circular A-21, Cost Principles for Educational Institutions, which include four key Cost Accounting Standards (501, 502, 505, and 506). The Circular provides definitions and examples of direct, indirect, allowable, and unallowable costs as well as acceptable conditions for applying costs to sponsored agreements.

OMB Circular A-21 requires a university, including the University of Vermont, with over $25 million of federal sponsored agreements in a fiscal year to disclose its cost accounting standards in a Cost Accounting Disclosure statement (DS-2).  Additionally, the University follows the NIH Grants Policy Statement, other agency-specific guidance, and the specific terms and conditions of individual sponsored agreements.

Four guiding principles or criteria from OMB Circular A-21 shall be used to determine whether a cost can be charged to a sponsored agreement. These criteria apply for both direct and indirect (Facilities & Administrative) costs, which are defined below. For a given cost to be charged to a sponsored agreement, all four (4) of these criteria must be met.

1. Reasonableness – For a cost to be considered reasonable, it must be:

• Recognized as necessary for the operation of the institution or the performance of the Agreement,
• Consistent with the requirements imposed by arms-length bargaining, federal or state laws and regulations, and ethical business practices, and
• Related to an action and/or in an amount deemed within the norms of business conduct (i.e., passes the “prudent person” test).

2. Allocability – For a cost to be considered allocable, it must:

• Be incurred solely to advance the work under a sponsored agreement, or
• Benefit both the sponsored agreement and other work of the institution, in proportions that can be approximated through the use of reasonable methods, and
• Be assignable to the benefiting activities without undue effort or cost.

3. Allowability – For a cost to be considered allowable, it must:

• Not be designated as “unallowable” under Section J of OMB Circular A-21,
• Adhere to sponsor-specific policies and award-specific terms and conditions regarding specific items of cost, and
• Adhere to University policies regarding specific items of cost.

4. Consistency – For a cost to meet the requirement of consistency,

• it must be treated in the same manner (i.e., as either direct or indirect) when used in like circumstances.
• This means that for all categories of costs, all activities within the University must account for such in the same manner when incurred in similar circumstances.

• Consistent treatment of costs is a basic cost accounting principle and is specifically required by OMB Circular A-21 to assure that the same types of costs are not charged to federally sponsored agreements both as direct costs and as indirect costs. This concept is reinforced and emphasized in a Cost Accounting Standard (referred to as “CAS 502”) that educational institutions are required to follow.
• Consistency in this context means that costs incurred for the same purpose, in like circumstances, must be treated uniformly as either direct costs or as indirect costs. Thus, since certain types of costs, such as the salaries of administrative and clerical staff, office supplies, and postage are normally treated as indirect costs, the same types of costs cannot be charged directly to federally sponsored agreements, unless the circumstances related to a particular project are clearly different from the normal operations of the institution.

A direct cost of a sponsored agreement is one that can be identified specifically with that sponsored agreement or that can be assigned to the sponsored agreement relatively easily with a high degree of accuracy. General cost categories that may be charged as direct costs to individual sponsored agreements include, but are not limited to, the following:

• Salaries, wages, and related fringe benefit costs of faculty, staff researchers, and research assistants.
• Graduate students
• Laboratory/scientific/technical materials, services, and supplies
• Scientific equipment costs
• Travel costs
• Consultant/subcontract costs
• Other direct costs as specifically required, budgeted, and/or approved as necessary to accomplish the purposes of the individual sponsored agreement.

If a cost benefits two or more projects/activities in proportions that can be determined without undue effort or cost, the cost should be allocated to the projects/activities based on the proportional benefit. If proportions cannot be determined due to the interrelationship of the work, then costs may be allocated on any reasonable basis.

For any allocation basis used, written support must exist in each case which describes how the allocations have been determined and why the method is reasonable.

Direct Cost Classification and Charging on Sponsored Agreements

Direct or indirect costs must be classified to the correct expense account as defined by the University Chart of Accounts. Improper classification for the purpose of charging an unallowable cost or an indirect cost as a direct cost on a sponsored agreement is prohibited.

Direct costs charged to sponsored agreements may not be shifted to other sponsored agreements 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.

Direct costs must be charged to the appropriate sponsored agreement when first occurred. Charging costs to a sponsored agreement until another sponsored agreement becomes available is prohibited.

Direct costs incurred for use on multiple funding sources which include a sponsored agreement(s) must be allocated based on the proportional benefit rule. The allocation process must use reasonable methods and be without undue effort or cost.

Direct costs charged to awards should be net of any applicable credits. Examples of such transactions are: purchase discounts, rebates, or allowances; recoveries or indemnities on losses; and adjustments of overpayments or erroneous charges.

OMB Circular A-21 defines indirect costs as those costs that are incurred for common or joint objectives and cannot be identified readily or specifically with a particular sponsored agreement, or any other institutional activity. Costs that are normally charged as indirect costs on sponsored agreements (via a Facilities & Administrative rate) include, but are not limited to, the following:

• Salaries and related fringe benefits of administrative and clerical staff
• Office supplies (pencils, paper, notebooks, standard forms, file folders, etc.)
• Postage costs (not identified in a budget narrative of a sponsored agreement)
• Telecommunications (office phone related costs including monthly equipment usage fees, pagers, internet, and cell phones)
• Physical plant work orders
• Memberships and subscriptions
• General purpose equipment
• General purpose computers, software, and computer supplies
• Hospitality

Generally, an unlike circumstance is defined as an activity/use of a cost item which is substantially greater in amount or different in purpose than the normal use of that cost type.

Specifically, in order to direct charge a cost on a federal sponsored agreement that would ordinarily be charged as an indirect cost, the following requirements must be met before consideration:

• The sponsored agreement has an extraordinary need for the item or service that is beyond the level of services normally provided by departmental administration,
• The cost can be specifically identified to the work conducted under the sponsored agreement and is appropriately documented,
• For sponsors requiring a budget and/or a budget narrative, the cost is specified in the proposed budget of the sponsored agreement and/or the unique circumstances requiring direct charging are justified in the proposal narrative.
• The sponsoring agency accepts (i.e. does not specifically disapprove) the direct charging of the cost as part of the sponsored agreement’s award documentation.
• The direct cost justification provides sufficient basis to classify an indirect cost as a direct cost within the context of the University’s cost accounting standards.