Allowable and Unallowable costs on federally funded sponsored project awards are defined in the Uniform Guidance.
Typical Allowable and Unallowable Expenses on Sponsored Project Awards
According to the Uniform Guidance, the cost of a sponsored award is comprised of the allowable direct costs incident to its performance, plus the allocable portion of the allowable facility and administrative costs of the institution, less applicable credits. The tests of allowability of costs under these principles are:
- They must be reasonable.
- They must be allocable to sponsored agreements under the principles and methods provided herein.
- They must be given consistent treatment through application of those generally accepted accounting principles appropriate to the circumstances.
- They must conform to any limitations or exclusions set forth in these principles or in the sponsored agreement as to types or amounts of cost items.
View Uniform Guidance definitions of Allowable Costs, Reasonable Costs and Allocable Costs below.
View a list of Unallowable Costs.
Factors Affecting Allowability of Costs - §200.403
Except where otherwise authorized by statute, costs must meet the following general criteria in order to be allowable under Federal awards:
(a) Be necessary and reasonable for the performance of the Federal award and be allocable thereto under these principles.
(b) Conform to any limitations or exclusions set forth in these principles or in the Federal award as to types or amount of cost items.
(c) Be consistent with policies and procedures that apply uniformly to both federally-financed and other activities of the non-Federal entity.
(d) Be accorded consistent treatment. A cost may not be assigned to a Federal award as a direct cost if any other cost incurred for the same purpose in like circumstances has been allocated to the Federal award as an indirect cost.
(e) Be determined in accordance with generally accepted accounting principles (GAAP), except, for state and local governments and Indian tribes only, as otherwise provided for in this part.
(f) Not be included as a cost or used to meet cost sharing or matching requirements of any other federally-financed program in either the current or a prior period. See also §200.306 Cost sharing or matching paragraph (b).
(g) Be adequately documented. See also §§200.300 Statutory and national policy requirements through 200.309 Period of performance of this part.
Reasonable Costs - §200.404
A cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person under the circumstances prevailing at the time the decision was made to incur the cost. The question of reasonableness is particularly important when the non-Federal entity is predominantly federally-funded. In determining reasonableness of a given cost, consideration must be given to:
(a) Whether the cost is of a type generally recognized as ordinary and necessary for the operation of the non-Federal entity or the proper and efficient performance of the Federal award.
(b) The restraints or requirements imposed by such factors as: sound business practices; arm's-length bargaining; Federal, state, local, tribal, and other laws and regulations; and terms and conditions of the Federal award.
(c) Market prices for comparable goods or services for the geographic area.
(d) Whether the individuals concerned acted with prudence in the circumstances considering their responsibilities to the non-Federal entity, its employees, where applicable its students or membership, the public at large, and the Federal Government.
(e) Whether the non-Federal entity significantly deviates from its established practices and policies regarding the incurrence of costs, which may unjustifiably increase the Federal award's cost.
[78 FR 78608, Dec. 26, 2013, as amended at 79 FR 75885, Dec. 19, 2014]
Allocable Costs - §200.405
(a) A cost is allocable to a particular Federal award or other cost objective if the goods or services involved are chargeable or assignable to that Federal award or cost objective in accordance with relative benefits received. This standard is met if the cost:
(1) Is incurred specifically for the Federal award;
(2) Benefits both the Federal award and other work of the non-Federal entity and can be distributed in proportions that may be approximated using reasonable methods; and
(3) Is necessary to the overall operation of the non-Federal entity and is assignable in part to the Federal award in accordance with the principles in this subpart.
(b) All activities which benefit from the non-Federal entity's indirect (F&A) cost, including unallowable activities and donated services by the non-Federal entity or third parties, will receive an appropriate allocation of indirect costs.
(c) Any cost allocable to a particular Federal award under the principles provided for in this part may not be charged to other Federal awards to overcome fund deficiencies, to avoid restrictions imposed by Federal statutes, regulations, or terms and conditions of the Federal awards, or for other reasons. However, this prohibition would not preclude the non-Federal entity from shifting costs that are allowable under two or more Federal awards in accordance with existing Federal statutes, regulations, or the terms and conditions of the Federal awards.
(d) Direct cost allocation principles. If a cost benefits two or more projects or activities in proportions that can be determined without undue effort or cost, the cost must be allocated to the projects based on the proportional benefit. If a cost benefits two or more projects or activities in proportions that cannot be determined because of the interrelationship of the work involved, then, notwithstanding paragraph (c) of this section, the costs may be allocated or transferred to benefitted projects on any reasonable documented basis. Where the purchase of equipment or other capital asset is specifically authorized under a Federal award, the costs are assignable to the Federal award regardless of the use that may be made of the equipment or other capital asset involved when no longer needed for the purpose for which it was originally required. See also §§200.310 Insurance coverage through 200.316 Property trust relationship and 200.439 Equipment and other capital expenditures.
(e) If the contract is subject to CAS, costs must be allocated to the contract pursuant to the Cost Accounting Standards. To the extent that CAS is applicable, the allocation of costs in accordance with CAS takes precedence over the allocation provisions in this part.
[78 FR 78608, Dec. 26, 2013, as amended at 79 FR 75885, Dec. 19, 2014]
This section of the Grants Administration Manual is intended as a quick reference for common types of costs. This section is not exhaustive, and the Office of Sponsored Projects should be contacted for specific questions concerning a cost, preferably in advance of the incurrence of a cost.
The following items of cost are Unallowable in accordance with the Uniform Guidance:
- Advertising, Public Relations
- Alcoholic Beverages
- Alumni Activities
- Bad Debts
- Certain Legal Costs
- Charitable Contributions
- Fines and Penalties
- First Class Air Travel
- Fund Raising, Investment Management
- Goods and Services for Personal Use
- Housing of Officers
- Interest Expense for Operating Purposes
- Lobbying Costs
- Losses on Sponsored Research Agreements
- Memberships in Civil, Community and Social Organizations
- Selling and Marketing Costs
- Telephone Line Costs
View a list of expenditure types that departments need to use when assigning appropriate expenditure codes on sponsored project awards.
Other items of cost may be Unallowable depending on the circumstances; in these instances, the Department Grant Manager should discuss with their Sponsored Research Manager.
If an Unallowable cost is charged to a sponsored project award, the Department Grant Manager for that award needs to fill out a Cost Transfer Form (if moving non-payroll charges) or a Wage Transfer Form (if moving payroll charges) to move that charge off the sponsored project award. After the appropriate form has been completed, the form needs to be reviewed and approved by the Principal Investigator or Designee and OSP before processing.
Please note that it is important that all expenses, regardless of funding source, must be coded as allowable or unallowable so that they can be appropriately included or excluded from facilities and administration cost calculations.