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Cost Allocations for Services

When a product or service contains ineligible components, a cost allocation may be used so that support can be provided for the eligible portion. A cost allocation is appropriate when a clear delineation can be made between the eligible and ineligible components. Several methods of cost allocation can be used, but they must meet the criteria of being based on tangible criteria that provide 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, a Private Branch Exchange (PBX) is a telephone switching system that often includes an ineligible intercom feature. If certain limited conditions are satisfied, the cost of the intercom functionality need not be cost allocated. For further information about this "ancillary use" provision, see Ancillary Use of Ineligible Components.

Free or Discounted Services

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.

USAC Review

In general, applicants are expected to provide cost allocation to USAC as a part of their funding requests on the FCC Form 471 (Services Ordered and Certification Form). USAC reviewers will evaluate whether the cost allocation meets the criteria of being based on tangible criteria that provide 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:

  • Internal Connections: if the manufacturer of the product has submitted cost allocation information to USAC, then that information may be used. Prior to modifying the funding request, USAC will inform the applicant of the intended modification. If the applicant does not agree with the intended modification, the applicant will be asked to provide an alternative cost allocation identifying the cost(s) of the ineligible item(s).
  • Network File Servers: cost allocation may be based on the functional uses of the server.
  • Cost of Ineligible Items Unknown: USAC will request documentation from the applicant identifying these costs so they may be removed from the funding request. The applicant may chose to split the Funding Request Number (FRN). Splitting the FRN involves removing the ineligible items from the original FRN and placing the ineligible items in a new FRN. If the applicant does not respond to this information request and the amount of the ineligible items is 30 percent or more of the funding request amount, the entire funding request will be denied under the 30% Rule.

In all cases of cost allocation regardless of service category, 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 information and supporting documentation.

If cost allocation is required for a component, then cost allocation is also required for the installation and maintenance of that component.

Methods of Cost Allocation

Possible methods for cost allocation include the following:

  • Sometimes a product bundle has individualized pricing for the components, and in this case the individualized pricing can be used to determine a cost allocation.
  • Sometimes a combination of products will be offered at a lower price than when the products are purchased separately. The discount must be applied evenly to the eligible and ineligible components.
  • File servers and other components that have multiple purposes, some eligible and some ineligible, can be cost allocated by using a simple average of the different functions for a product.
  • Some but not all technical services are eligible for discount. A fair and accurate determination of resources to be utilized for each part of a project may be submitted.
  • Equipment racks and uninterruptible power supplies are sometimes used for both eligible and ineligible components.
  • A telecommunications or Internet access service can in some cases serve both an eligible and ineligible location. A statistical sample that shows the percent of use for each location may be submitted.
  • In some cases, the up-front infrastructure costs of a telecommunications or Internet access service provider can be eligible for support but only that portion that is attributable to the applicant.

Because applicants can use products and services in many different ways, no single cost allocation approach is necessarily appropriate for all circumstances.

In addition, any cost allocation method including those indicated here cannot be accepted if the result is not reasonable.

Requesting Funding

When cost allocation is required, the Item 21 Attachment should provide clear information that will allow an efficient review by USAC. The attachment should contain separated pricing for the eligible and ineligible components and sufficient information to determine if the cost allocation is reasonable. See Item 21 Attachments for FCC Form 471.

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.

Manufacturer and Service Provider Submissions

Manufacturers or service providers that wish to submit cost allocation information to USAC may use the following contact information.

By Mail:
Cost Allocation Guidelines
Schools and Libraries - Correspondence Unit
30 Lanidex Plaza West
PO Box 685
Parsippany, NJ 07054-0685

By Email:
Email

Examples

(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 video delivery system that costs $5,000, standard pricing of the components is as follows: CODEC-$1,200, archive server-$3,800, video camera-$600, and video monitor-$400. These individual prices must be separately identified in the documentation between the applicant and service provider. In this case, only the CODEC is eligible so the eligible cost of the product bundle is $1,200.

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 end-user telephone sets is 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: File servers and other components that have multiple purposes

A file server may be used for more than a single function, such as an email server (eligible), firewall server (eligible), and for storage of non-email end-user files (not eligible). 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.

A description of eligible and ineligible server types is provided in the entry for "Network File Servers" in the Special Eligibility Conditions of the Eligible Services List. Coincidental uses, such as use of a file server in part as a print server, when the print server functionality is a part of the core network operating system, need not be included in a cost allocation determination for a file server used principally for other purposes.

Example 4: Technical services for both eligible and ineligible purposes

Some services such as project management, design, and engineering are eligible for support but many such services are not. For example, while some training services are eligible, many types of training including end-user training are not eligible. Applicants must ensure that funding requests that include technical services provide an accurate separation of the technical services that are eligible for discount and those that are not. Applicants should review the appropriate Eligible Services List for additional information about the eligibility limitations surrounding technical services.

Example 5: Components that directly support other partially eligible components

If a component is cost-allocated and protected by an uninterruptible power supply (UPS), the cost allocation percentage applied to the component must be applied to the UPS. This cost allocation requirement is also true for other products and services (such as equipment racks and maintenance contracts) that are eligible only to the extent that the supported equipment is eligible. For example, if a file server is cost-allocated to be 60 percent eligible, then a maintenance contract for that file server would also be 60 percent eligible.

Similarly, if multiple components are protected by a UPS, and only some of those components are eligible, then cost allocation is required. The potential methods for such cost allocation include a determination of how many of the components are eligible in comparison to the total number of components being protected or could be based on the relative power drain of the components.

Example 6: A Priority 1 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.

Example 7: Infrastructure costs of a service provider

As indicated in the document Wide Area Networks (WANs), a service provider's cost of infrastructure build out can in certain cases be an eligible cost. Restrictions apply, and in many cases a service provider will install new facilities not only for the benefit of a single applicant but also for other present and potential future customers. Costs not attributable to the applicant are not eligible. For example, assume that an applicant desires a fiber service that can be provided by six fiber optic strands. A service provider might install infrastructure for 108 fiber strands. Only the apportioned costs for the six fiber strands are eligible.