Updated September 2015
When a product or service contains ineligible components, a cost allocation is required to remove the ineligible components so that only the eligible portion is funded. A cost allocation requires a clear delineation between the eligible and ineligible components. Several methods of cost allocation can be used, but they must be based on tangible criteria that reach a realistic result. The price for the eligible portion must be the most cost-effective means of receiving the eligible service.
In isolated cases, ineligible features are an insubstantial and inseparable part of a product or service. For example, some Internet access services include a built in content filtering service as part of their service. Since this component is a part of the standard product offering and there are no costs associated with this component, it would not require cost allocation and would qualify as "ancillary." For further information about this "ancillary use" provision, see Ancillary Use of Ineligible Components.
When a package of products and services has mixed eligibility, applicants and service providers must follow the cost allocation procedures provided above. The allocation cannot be inappropriately weighted in a way that subsidizes the ineligible services. The Free Services Advisory provides further detail to help applicants and service providers avoid arrangements that are contrary to program rules.
In general, applicants are expected to provide a cost allocation to USAC as a part of their funding requests on the FCC Form 471 (Services Ordered and Certification Form) to remove the ineligible portion. USAC reviewers will evaluate whether the cost allocation meets the criteria of being based on tangible criteria that reach a realistic result.
If no cost allocation information is submitted by the applicant and USAC determines that cost allocation is required, the following approach is used:
In all cases of cost allocation regardless of service type, USAC will contact the applicant about the intended funding request reduction. This additional contact allows the applicant to confirm the cost allocation or challenge the cost allocation by submitting alternative supporting documentation.
Note: If cost allocation is required for a component, then cost allocation is also required for the installation and maintenance of that component.
Possible methods for cost allocation include the following:
Because products and services can be used in many different ways, no single cost allocation methodology is required. However, any methodology must meet the test of being based on tangible criteria that reach a realistic result.
When cost allocation is required, the FCC Form 471 should provide clear information that will allow an efficient review by USAC. It should contain separate pricing for the eligible and ineligible components and sufficient information to determine if the cost allocation is reasonable.
Applicants should be sure that they include accurate cost allocation information as part of funding requests.
Contracts for products and services should be tailored to indicate appropriate cost allocations in the event that a copy of the contract is requested as part of USAC's review.
Manufacturers or service providers that wish to submit cost allocation information to USAC may use the following contact information.
The following examples are representative only rather than all-inclusive.
Example 1: A bundle of products and/or services consists of components that have individualized pricing.
If the standard costs of the service provider are available for the components of a product bundle, these costs can be used to determine the eligible portion. For example, assume that, for a firewall that costs $5,000, standard pricing of the components is as follows: Hardware $3,800, operating software $1,000, spam license (ineligible) $100, and intrusion prevention license (ineligible) $100. These individual prices must be separately identified in the documentation between the applicant and service provider. In this case, only the hardware and operating system software are eligible so the eligible cost of the product bundle is $4,800.
In some cases a single physical product will combine the functions of several components. The same approach is used in such cases, most typically by the manufacturer submitting acceptable cost allocation information to USAC.
Example 2: A bundle of products and/or services includes a discount.
Assume that an applicant leases an eligible telecommunications service for $150 per month and that use of four ineligible telephone sets are provided with this service. Only the transmission component of this bundled offering is eligible for support. Assume that the usual price of the telecommunications service is $140 and the usual price for lease of the four telephone sets is $60. The discount provided must be allocated evenly between the eligible and ineligible components. That is, the bundled price is 150 / (140 + 60), or 75 percent of the price of the separate components. Therefore the eligible portion of the bundled offering is the unbundled price of the eligible portion ($140) times the discount provided (75 percent), or $105.
Example 3: Components that have multiple purposes.
A component may support both eligible and ineligible devices depending on what it is being used for/with. If, for example, the UPS device supported a router (eligible), a switch (eligible) and an email server (ineligible), cost allocation can be based on these functions. In this example, two out of three functions are eligible. The applicant can show this determination as a part of its funding request and seek funding for the portion of the server (67 percent) that is eligible.
Example 4: A Category One service that is accessible from both eligible and ineligible locations.
Assume that a single telephone service is accessible from both a school and an ineligible facility. Applicants can submit an estimate of the percent of use at each location in order to obtain funding for the eligible portion. Such an estimate must be reasonable and must be compared with actual statistical information once service takes place. A true-up may be attached to an invoice submitted on paper to reconcile any differences between the initial estimate and the actual usage figures.