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Cost Allocation Guidelines for Products and Services that Contain Eligible and Ineligible Components

Overview
1. First Model: Cost allocation for products and services with mixed eligibility
 

 

1a. Telecommunications Services

 

1b. Internet Access

 

1c. Internal Connections

2. Second Model: Eligible products and services that include ineligible components on an ancillary basis
3. Guidance for completing Form 471 for products or services that require cost allocation
4. Free or discounted services

Overview

Discounts under the Schools and Libraries Support Mechanism can be provided only for products and services that are eligible under program rules. However, products and services available in the commercial marketplace may contain both eligible and ineligible components. This document describes how the Schools and Libraries Division (SLD) administers eligibility determinations in such cases.

For general information about the criteria for identifying eligible products and services, see the Eligible Services Framework posted in the Reference Area of this web site.

Two models are employed by the SLD when a product or service has mixed eligibility. The components that are requested in an applicant’s Request for Proposal can affect which one of the two models is applicable.

  • In the first model, products or services may contain a significant ineligible portion. In some circumstances, the eligible portion can still receive program funds through a cost allocation process, as described in Section 1 below. This cost allocation model must be used when an applicant specifically seeks bids on components that are not eligible. Further information, and examples of cost allocation principles for Telecommunications Services, Internet Access, and Internal Connections, are provided in Sections 1a, 1b, and 1c below.
  • The second model is used in certain limited circumstances, when the vast majority of the functionality of a product or service is eligible but an ineligible capability is also provided on an ancillary basis. This is described in Section 2 below.

Some details about the application process for mixed eligibility requests are provided in Section 3, and a reference to related information involving free or discounted services is provided in Section 4.

1. First Model: Cost allocation for products and services with mixed eligibility

Cost allocation may be used for products or services that contain a combination of eligible and ineligible components, when a clear delineation can be made between the eligible and ineligible components.

The FCC has indicated that "schools and libraries may not receive support for contracts that provide only a single price for a package that bundles services eligible for support with those that are not eligible for support" [FCC Report and Order, CC Docket No. 96-45, FCC 97-157, released May 8, 1997, para. 462]. Thus, distinct and separated pricing is necessary between eligible and ineligible components.

The price for the eligible portion must represent the most cost-effective choice. The evaluation of cost-effectiveness is made without considering the benefits related to ineligible features.

The allocation of costs most typically is based on commercially available pricing for the eligible and ineligible components. The cost allocation method employed must be based on tangible criteria, and provide a realistic result.  Costs may not be disproportionately distributed to the eligible products or services. Applicants should maintain documentation of this determination to ensure that they can substantiate that the competitive bidding requirements of FCC rules have been met.

Cost allocation cannot be used in instances where a clear division between eligible and ineligible components is not available. For example, the FCC has ruled that a file server used principally for ineligible storage is fully ineligible, even if the server also provides some eligible functions [FCC Order, CC Docket No. 96-45, DA 01-1936, released August 16, 2001].

The next sections provide further information about cost allocation principles, with examples included for Telecommunications Services, Internet Access, and Internal Connections.

1a. Telecommunications Services

Telecommunications carriers sometimes market telecommunications services bundled with customer equipment for a single price. For example, eligible telecommunications providers might offer a package that also includes a station set or telephone. The price of the transmission service must be separately identified from the price of the station set or telephone in the documentation between the customer and the service provider. Only the transmission component of this bundled offering is eligible for discounts.

If a cost reduction or discount is provided by combining products into a bundled offering of eligible and ineligible components, then this cost reduction or discount must be applied proportionately to eligible and ineligible components. For example, assume that an applicant leases an eligible telecommunications service for distance learning, and also leases the ineligible cameras associated with the service. The combined cost for the package is $800 per month. If the applicant were to obtain these services separately, the cost would be $600 per month for the telecommunications service and $400 per month for the cameras, for a total of $1,000 per month. Thus, by obtaining the package price, the applicant only pays 80% of the unbundled price ($800 / $1000 = 80%). This factor, which is equivalent to a 20% discount, must be allocated evenly to both the eligible and ineligible portions. That is, the appropriate amount to allocate for the eligible telecommunications service is $480 per month ($600 * 80% = $480), and the amount attributable to the ineligible lease of cameras is $320 per month ($400 * 80% = $320). The $480 figure is the appropriate pre-discount price to indicate in the Funding Request.

Cost allocation cannot be used to change an intrinsically ineligible service to a partially eligible service. For example, cable television service, a service which is not eligible for E-rate discounts, consists of a transmission component and a content component. An applicant cannot use cost allocation to separate out the transmission component and request discounts on that component as an eligible telecommunications service.

1b. Internet Access

The cost of Internet access should be unbundled from the cost of ineligible features. Ineligible features include extra-cost file storage, filtering services, and specialized content that does not meet the standard set forth in Section 2 of this document regarding ancillary use. Applicants who specifically seek ineligible features as part of a service package must be sure that separate pricing is provided for the eligible and ineligible components.

For example, assume that an applicant seeks bids for Internet access service, and asks that the bids include ineligible filtering. The applicant must ensure that the ineligible filtering is costed fairly and separately from the eligible Internet access, or the Funding Request risks denial.

In some cases, Internet access can include ineligible features on an ancillary basis, and the full cost of the Internet access can be eligible for discount. Specific conditions exist for this situation, and they are described further in Section 2 below. However, when both eligible and ineligible components are being sought, or the ineligible features are substantial, cost allocation must be used.

1c. Internal Connections

An applicant must back out the ineligible costs from a bundle of products or services. For example, assume that a service provider offers a turnkey video conferencing package at favorable pricing that includes shared infrastructure components (eligible), plus cameras, microphones, and display monitors (all ineligible). The stand-alone price of each component can be used to determine the proportionate cost that is eligible. (See the similar example in Section 1a that involves a proportionate allocation of telecommunications components.)

To expand on the above example, assume now that the manufacturer of the above products creates a single physical product that combines the functionality of all the above components — infrastructure, camera, microphone, and display monitor. Even though in many cases such a single product could not be cleanly divided into eligible and ineligible portions, such a division may be possible in this case due to the clear differentiation in the functionality of the component parts. This could be achieved if the equipment manufacturer provided a cost breakdown of components. In such a case, the portion of the product cost associated with eligible components would be eligible. The applicant and service provider must document the determination of this separated pricing.

As a final example, assume that a software product includes an integrated combination of database, groupware, and e-mail. No individual pricing is available for these functions. Even though e-mail software can be eligible, the inclusion of substantial ineligible components without a cost breakdown makes the entire product ineligible.

2. Second Model: Eligible products and services that include ineligible components on an ancillary basis

To understand how the SLD applies the concept of ancillary use, consider a Private Branch Exchange (PBX), which is a telephone switching system used by many organizations to route calls to individual phone extensions. A PBX is eligible as internal connections under program rules. However, many PBX’s include an intercom component on an ancillary basis, and a stand-alone intercom system is not eligible for discount. SLD allows PBX’s to include an intercom component under conditions that ensure program integrity. If the ineligible component is priced or sold separately, then this cost must be subtracted from the amount eligible for discount, as provided in the discussion about cost allocation in Section 1. However, if the ancillary ineligible function is not priced or sold separately, the full product or service may be eligible for discount if this is the most cost-effective option.

SLD allows PBX’s to include an intercom component under conditions that ensure program integrity. If the ineligible component is priced or sold separately, then this cost must be subtracted from the amount eligible for discount, as provided in the discussion about cost allocation in Section 1. However, if the ancillary ineligible function is not priced or sold separately, the full product or service may be eligible for discount if this is the most cost-effective option.

The principle of ancillary use also can apply in the case of Internet access and in other circumstances provided in the Eligible Services List posted in the Reference Area of this web site.

The ancillary use approach is available strictly for circumstances in which the ineligible functionality is an insubstantial feature in the overall product offering.  The general rule is that a mixed-eligibility product or service is NOT eligible, if only a single price is provided.  Thus, in most cases for such products or services, cost allocation is required, as described in the previous section.

However, in certain limited cases, an eligible product or service can include ineligible components on an ancillary basis, if the following conditions apply:

  • The package represents the most cost-effective bid for the eligible product or service.
  • The consideration of cost-effectiveness must be made without considering ineligible features.
  • The package is a standard product offering that includes the ineligible features as an intrinsic part, with no separated pricing available.
  • Any added content must be minimal.

Since the applicant must be able to affirmatively show that the package is the most cost-effective bid, the applicant must retain records of the service provider selection process to substantiate the selection if asked.

Note that when an applicant specifically seeks one or more ineligible components in addition to eligible components, or the ineligible capability provides significant functionality, then "ancillary use" will not apply, and cost allocation must be used.

3. Guidance for completing Form 471 for products or services that require cost allocation

In cases where the cost allocation principles can be applied to a product or service, applicants should ensure that the contract or agreement with the service provider indicates a clear and appropriate cost breakdown between the eligible and ineligible components.

Ineligible components can be treated in one of two ways when completing the Form 471. First, if the ineligible components represent completely separate products or services, then these components and their associated costs need not be specified on the Form 471. Second, the cost of the ineligible components can be subtracted using Item 23B and/or Item 23G of the Form 471, Block 5 Funding Request.

In the case of a single product that can be easily separated into its components — as in the example provided in Section 1c involving video components — manufacturers may provide cost information to the SLD prior to the Form 471 application process in order to establish the component breakdown used in the contract or agreement between the service provider and applicant. Such information may be submitted to:

Services Manager
Schools and Libraries Division
Box 125 — Correspondence Unit
80 S. Jefferson Road
Whippany, New Jersey 07981

Manufacturers or service providers may call the Schools and Libraries Services Manager at (973) 884-8000 for further information.

4. 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 in this document. The allocation cannot be inappropriately weighted in a way that subsidizes the ineligible services. In this regard, applicants and service providers should be aware of the requirements of the Free Services Advisory posted in the Reference Area of this web site. That document provides further detail to help applicants and service providers avoid arrangements that are contrary to program rules.

Content Last Modified: January 28, 2005