The Principles of Allowable Cost under Uniform Guidance for Your Nonprofit

At a glance

• When your nonprofit organization receives federal funding subject to 2 CFR 200 Subpart E – Cost Principles, there are rules around allowable cost that must be followed.
• Unallowable cost charged to a federal award can result in audit findings and questioned costs.
• Having a good understanding of the principles behind the rules is necessary.

The Uniform Guidance sets forth Cost Principles in 2 CFR 200 Subpart E. When you apply for federal award funding, you agree that your organization will follow these principles. Your organization must set up internal controls to ensure compliance. But what do you do when you aren’t sure if a cost is allowable? It’s recommended to keep a list of common expenses incurred for your program and general operations and note whether they meet the qualifications to be allowable. Grasping the underlying principles of the Cost Principles in the Uniform Guidance is crucial. It serves as a compass when you encounter uncertainties in the realm of federal award funding.

As outlined in 2 CFR 200.403, costs charged to federal awards, whether direct or indirect, must adhere to specific criteria. Understanding these criteria is essential for organizations to ensure their expenses align with the regulations:

1. Be necessary and reasonable for the federal award’s performance and be allocable under these principles.
2. Conform to any limitations or exclusions outlined in these principles or the Federal award regarding the types or amount of cost items.
3. Be consistent with policies and procedures that apply uniformly to both federally financed and other activities.
4. 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.
5. 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.
6. It should not be included as a cost or used to meet cost-sharing or matching requirements of any other federally financed program in the current or a prior period.
7. Be adequately documented.
8. Administrative closeout costs may be incurred until the due date of the final report(s). If incurred, these costs must be liquidated prior to the due date of the final report(s) and charged to the final budget period of the award unless otherwise specified by the Federal agency. All other costs must be incurred during the approved budget period. At its discretion, the Federal agency is authorized to waive prior written approvals to carry forward unobligated balances to subsequent budget periods.

To restate in simpler terms and examples:

1. Would a first-class airline ticket for domestic travel be necessary and reasonable for the performance of the award? Most likely not because there are alternatives. As a recipient of federal grants, your organization is responsible for the efficient and effective administration of the Federal award through sound management practices.  “Sound management” can be defined as “Would a prudent person make the same judgment under like circumstances?”
2. Limitations and exclusions are detailed in Subpart E, with examples starting at 2 CFR 200.420 Considerations for selected items of cost and may also be detailed in your grant agreement if there is something specific to your award program.
3. Your organization must have written policies and internal control procedures that dictate how unallowable costs will be treated. Unallowable costs should to be broken out separately in your chart of accounts so they can be tracked and not included in your indirect cost pool. The policies must apply to all activities, not just the federal award.
4. No double-dipping. A cost cannot be included as a direct cost and also in the indirect cost pool. Doing so would effectively be charging the agency twice for the same cost.
5. Your costs should be tracked on an accrual basis. While there is no requirement that the Schedule of Expenditures of Federal Awards (SEFA) be presented on an accrual basis, having it on a cash basis means you cannot be considered a low-risk auditee for Single Audit purposes.
6. Again – no double-dipping! You can’t include a cost directly or indirectly charged to the award program as a cost-share item. Cost share is not paid by the Federal Government under another Federal award..
7. Costs incurred must be adequately documented to be allowable! Missing or insufficient documentation of an expenditure will result in an unallowable cost and possibly questioned costs in the Single Audit Schedule of Findings and Questioned Costs.
8. The period during which closeout costs can be charged to an award ends on the due date of the final reports. If you will incur pre-award costs, make sure to get that approved. The same goes for obtaining a no-cost extension if you need more time to complete the project. Trying to pass off costs outside the period of performance will result in unallowable costs and possibly questioned costs in the Single Audit Schedule of Findings and Questioned Costs.

A good rule of thumb to apply when determining whether a cost is allowable is asking, “Who does it benefit?”. Suppose the answer is that incurring the cost benefits the organization or an individual more than it benefits the award program and its purpose. In that case, it is likely an unallowable cost.

Understanding the principles behind the rules of allowable costs will help your organization develop solid policies and procedures to ensure that no unallowable costs get charged to Federal awards. When in doubt, read the cost principles in Subpart E and maintain a listing of frequently incurred items that can be utilized as a resource to the purchasing and procurement personnel.

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