Cost Allocations for Services
E-Rate funds may only be used for services and products used by eligible entities for an eligible purpose (i.e., a primarily educational purpose). 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 (see below), but they must be based on tangible criteria that reach a reasonable 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, certain internet access services include built-in content filtering as part of the service. As this component is a part of the standard product offering and there are no itemized costs associated with this component, the filtering would be considered “ancillary” and would not require cost-allocation.
For further information about the “ancillary use” provision, see Ancillary Use.
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 on this page. The cost 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 violate program rules.
USAC Review of Cost Allocation
In general, applicants are expected to provide a cost allocation to USAC as a part of their funding requests on the FCC Form 471 (Description of Services Ordered and Certification Form) to remove the ineligible portion(s) of the funding request. USAC will evaluate whether the cost allocation is based on tangible criteria that reaches a reasonable result.
If no cost allocation information is submitted by the applicant and USAC determines that cost allocation is required, the following approach is used:
- Cost of Ineligible Items Known: If the service provider or 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).
- Cost of Ineligible Items Unknown: USAC will request documentation from the applicant identifying these costs so they may be removed from the funding request to avoid denial of funds. The applicant may choose 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.
In either case if the applicant disagrees or USAC does not have sufficient information, the 30% Rule may apply.
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.
Methods of Cost Allocation
Possible methods for cost allocation include the following:
- If a product bundle has individualized pricing for the components, the individualized pricing can be used to determine a cost allocation.
- Components that have multiple purposes or support both eligible and ineligible functions can be cost allocated by considering the functions for a product equal in value (see example 3 below).
- Some, but not all, technical services are eligible for discount. Applicants may submit a fair and accurate determination of resources to be utilized for each part of a project, for example, a work log demonstrating the time spent on ineligible tasks.
- A service can in some cases serve both an eligible and ineligible location. An itemized bill identifying which locations are receiving services may be used to ensure only eligible sites are being funded. Absent itemized vendor documentation, a snapshot or statistical sample that shows the percent of use for each location may be submitted. Entities, including consortia, may review the number of lines/circuits each entity is receiving and perform a straight line allocation from the total charges to attribute costs per entity.
- In some cases, the up-front infrastructure costs of a telecommunications or internet access service provider can be eligible for support, but only the portion that serves the applicant.
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 reasonable 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.
Manufacturer and Service Provider Submissions
Manufacturers or service providers that wish to submit cost allocation information to USAC may use the following contact information.
Cost Allocation Examples
The following examples of cost allocations are representative only.
- 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 which includes a discount
Assume that an applicant leases an eligible telecommunications service bundle for $150 per month and the bundle includes the 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 itemized individual price of the telecommunications service is $140 and the itemized individual price for lease of the four telephone sets is $60 for a total price of $200 prior to the discount. The discount provided must be allocated evenly between the eligible and ineligible components. That is, the bundled price of $150 represents 75 percent of the sum of the itemized pricing for the eligible telecommunications service and the ineligible telephone sets. (Calculations: $150 / $200) Therefore the eligible portion of the bundled offering is the unbundled price of the eligible portion ($140) times the calculated eligible percent discount (75 percent), or $105.
- Example 3: Components that have multiple purposes or uses
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 internet 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.