3. Basic Grants Management Principles

Allowable Cost Determination

Determinations of cost allowability are based on principles found in the OMB Cost Principles (A-87). Costs must meet certain criteria to be allowable. The costs must be reasonable, necessary, and conform to limitations set forth in legislation, regulation, or circulars. They must be consistent with the grantee's policies and procedures such as agency procurement policies. Grantees are required to determine and adequately document costs in accordance with Generally Accepted Accounting Principles (GAAP). Failure to follow these principles may result in an inappropriate use of Federal funds; as the result of an audit finding or questioned cost, the grantee may have to repay the funds or incur a financial penalty.

Attachment B of OMB Circular A-87 lists numerous "Selected Items of Cost." A cost is not necessarily unallowable just because it is not listed in these circulars. If a specific cost is not listed, the cost must meet the "necessary and reasonable" principle before being charged to the program. Costs that are listed as unallowable under certain paragraphs cannot be shifted to another category to make them allowable. For example, all forms of fundraising and lobbying costs are unallowable and are noted as such in the cost principles.

Costs must also be "allocable" to a program to be allowable. Costs can be allocated in one of three ways. They can be directly charged, proportionately charged, or be an indirect cost. A direct cost is a cost which is incurred specifically for one program, such as the salary of a program manager. A cost which is proportionately allocated is one which benefits more than one program. An example of a proportionately allocated cost would be the salary for an administrative assistant who works for two programs. This salary cost would be allocated based on the number of hours worked for each program. Indirect costs benefit all programs in an agency or tribal government equally. These costs are charged to an indirect cost pool and allocated to the programs using an indirect cost rate. This rate is determined during the indirect cost negotiation process and is approved by the cognizant Federal agency.

A written cost allocation plan is required for costs which are allocated proportionately between programs. The plan must include the items of cost, the basis for allocation, and the funding source information to which the cost will be allocated.

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