Cost Principles Requirements of Federal and State Grants - Overview

Carol A Kraus, CFO
Department of Human Services
June 1, 2010

Why is Cost Allocation Important?

  • Why is Cost Allocation Important?
  • What are allowable or unallowed costs?
  • What is the difference between Direct and Indirect Costs?
  • What is a Cost Allocation Plan?
  • How do I calculate indirect cost rates?
  • How does this impact my organization?

Learning Objectives

  • OMB Circular A-110 (2 CFR Part 215)
  • Cost Allocation Overview
  • OMB Circular A-122 (2 CFR Part 230)
  • Basic Guidelines for Costs
  • Direct and Indirect Costs
  • Indirect Cost Rate Proposal
  • Cost Allocation Plan Process
  • Reporting of Time and Effort of Staff
  • Questions and Answers

OMB Circular A-110

What is "OMB Circular A-110"?

  • Provides uniform administrative requirements for grants and agreements with non-profit organizations
  • Codified in the Code of Federal Regulations at 2 CFR Part 215
  • The provisions of the Circular apply to subrecipients performing work under awards if such subrecipients are non-profit organizations (2 CFR §215.5)

What does OMB Circular A-110 require?

Financial management systems that provide:

  • Accurate, current and complete disclosure of the financial results of each federally-sponsored project or program.
  • Records that identify adequately the source and application of funds for federally-sponsored activities
    • Contain information pertaining to Federal awards
    • Authorizations
    • Obligations
    • Unobligated balances
    • Assets
    • Outlays
    • Income
    • Interest
  • Effective control over and accountability for all funds, property and other assets
  • Comparison of outlays with budgetary amounts for each award
  • Cash management written procedures
  • Written procedures for determining the reasonableness, allocability and allowability of costs in accordance with the provisions of the applicable Federal cost principles (OMB Circular A-122)
  • Accounting records including cost accounting records that are supported by source documentation

Accounting Systems

Cost Allocation is predicated on the premise that organizations maintain an adequate accounting system and accounting records to document costs and support claims (2 CFR §215.21(b)(7))

Cost Allocation Overview

What is "Cost Allocation"?

  • Cost Allocation is a Process to Determine the "Total Cost" of a "Cost Objective"
  • Achieved By Distributing or Apportioning Costs to a Benefiting "Cost Objective"
  • Using Statistical Data or Metrics that Measure the Usage of a Service or the Relative Benefit Received

Commingling of Funds

  • The accounting systems of all recipients and subrecipients must ensure that Federal funds for a particular award are not commingled with funds from other Federal awards or other sources. Each award must be accounted for separately. Recipients and subrecipients are prohibited from commingling funds on either a program-by-program or project-by-project basis.
  • Federal funds specifically budgeted and/or received for one project may not be used to support another. Where a recipient's or subrecipient's accounting system cannot comply with this requirement, the recipient or subrecipient shall establish a system to provide adequate fund accountability for each project it has been awarded.

    Part II, Chapter 3, Financial Guide, U.S. Department of Justice, Office of Justice Programs (OJP)

What is a "Cost Objective"?

  • A "Cost Objective" is a particular award, contract, grant, project, service, or other activity of an organization for which cost data are desired and for which provision is made to accumulate and measure the costs

What is the "Total Cost" of a Cost Objective?

  • "Total Cost" is composed of the sum of the allowable direct costs and allocable indirect costs, less any applicable credits.
  • Total Costs = Direct + Indirect
    • Direct Costs Can be identified specifically with a particular final cost objective (i.e., a particular award, service or direct activity)
    • Indirect Costs Incurred for common or joint objectives and cannot be readily identified with a particular final cost objective

Allocating Indirect Costs

  • Allocation Bases: The methodology or statistical measure by which Indirect Costs are distributed to other benefiting services and/or cost objectives
  • Examples May Include: Number of Active Employees; Number of Transactions Processed; Square Footage Occupied; Salaries and Wages of Units Supervised;

Basic Cost Allocation Guidelines

  • United States Office of Management and Budget (OMB) Circular A-122 - Purpose: Establish principles for determining costs of grants, contracts and other agreements with non-profit organizations. (§230.5 of 2 CFR Part 230)

OMB Circular A-122 Overview

  • Basic Principle: The principles are designed to provide that the Federal Government bear its fair share of costs except where restricted or prohibited by law. (emphasis added) (§230.15 of 2 CFR Part 230)
  • Basic Guidelines for Costs To Be Claimed Under Federal Awards, Costs Must Be: "Allowable" "Reasonable" "Allocable"

Allowable Costs

To Be Allowable, Costs Must Meet the Following General Criteria:

  • Be "reasonable" for the performance of the award
  • Be "allocable" to the award under OMB A-122 cost principles
  • Conform to any limitations or exclusions imposed by OMB A-122 cost principles or in the award as to the types or amount of cost items
  • Be consistent with policies and procedures that apply uniformly to both federally-financed and other activities of the organization
  • Be accorded consistent treatment
  • Be determined in accordance with generally accepted accounting principles (GAAP)
  • Not be included as a cost or used to meet cost sharing or matching requirements of any other federally-financed program Be adequately documented

Reasonable Costs

A Cost is Reasonable if it Meets the Following General Criteria:

  • Pass prudent person test - it does not exceed that which would be incurred by a prudent person under the circumstances prevailing at the time of the decision to incur the costs
  • Recognized as ordinary and necessary for the operation of the organization or the performance of the award
  • Constitutes sound business practice, including arms length bargaining, and conforms to the restraints and requirements of Federal and State laws and regulations, and terms and conditions of the award
  • Prudence exercised in the circumstances considering responsibilities to the organization, its members, employees, clients, public, and Federal Government
  • Does not significantly deviate from the organization's established practices

Allocable Costs

To be Allocable, Costs Must Meet the Following General Criteria:

  • A cost is allocable in accordance with the relative benefits received
  • Treated consistently with other costs incurred for the same purpose in like circumstances and
    • Incurred specifically for the award (direct relationship), or
    • Benefits both the award and other work and can be reasonably distributed in proportion to the benefits received, or
    • Is necessary to the overall operation of the organization and a direct relationship to any particular cost objective cannot be shown
  • Costs allocable to a particular award or cost objective may not be "shifted" to other Federal awards to overcome funding deficiencies, or to avoid restrictions by law or by terms of the award

Direct Costs

  • Direct Costs are those costs that can be identified specifically with a particular final cost objective (i.e., a particular award, project, service, or other direct activity of an organization)
  • Costs identified specifically with awards are direct costs of the awards and are to be assigned directly to the award
  • Costs identified specifically with other final cost objectives of the organization are direct costs of those cost objectives and are not to be assigned to other awards directly or indirectly
  • Administrative Costs can be Direct if they can be directly tied to a cost objective including:
    • Office supplies
    • Rent
    • Utilities
    • Postage
    • Administrative support such as clerical;
    • Duplication cost;
    • Property Insurance;
    • Also see indirect General and Facility Costs that can be directly tied to a cost objective, that meet the "reasonable and necessary" of carrying out a program.

Indirect Costs

  • Indirect Costs are those that have been incurred for common or joint objectives and cannot be readily identified with a particular final cost objective
  • After direct costs have been determined and assigned directly to awards or other work as appropriate, indirect costs are those remaining to be allocated to benefiting cost objectives
  • A cost may not be allocated to an award as an indirect cost if any other cost incurred for the same purpose, in like circumstances, has been assigned to an award as a direct cost
  • Typical examples of indirect costs for many non-profit organizations may include
    • Depreciation or use allowances on buildings and equipment
    • Costs of operating and maintaining facilities
    • General administration and general expenses, such as the salaries and expenses of executive officers, personnel administration, and accounting
  • Indirect Costs shall be classified within two broad categories: "Facilities" and "Administration"
    • Facilities" includes
      • depreciation and use allowances on buildings, equipment and capital improvements
      • interest on debt associated with certain buildings, equipment and capital improvements, and
      • operations and maintenance expenses incurred for the administration, operation, maintenance, preservation, and protection of the organization's physical plant
      • Operations and maintenance expenses include:
        • Janitorial and utility services
        • Repairs and ordinary or normal alterations of buildings,
        • furniture and equipment
        • Care of grounds
        • Maintenance and operation of buildings and other facilities
        • Security
        • Disaster preparedness
        • Environmental safety
        • Property, liability and other insurance relating to property
        • Space and capital leasing
        • Facility planning and management
        • Central receiving
      • Cross allocations from other pools, as applicable
    • Administration" includes
      • General administration and general expenses that have been incurred for the overall general executive and administrative offices of the organization and other expenses of a general nature which do not relate solely to any major function of the organization
      • Examples of this category include:
        • Director's office
        • Office of finance
        • Business services
        • Budget and planning
        • Personnel Safety and risk management
        • General counsel
        • Management information systems
        • Library costs and
        • All other types of expenditures not listed specifically under one of the subcategories of "Facilities" (including cross allocations from other pools, as applicable)
      • Special care should be exercised in developing the "Administration" cost pool to ensure that costs incurred for the same purposes in like circumstances are treated consistently as either direct or indirect costs
      • Organizations receiving more than $10 million in Federal funding of direct costs in a fiscal year must breakout indirect costs between "Facilities" and "Administration"

What is a Cost Allocation Plan?

  • A Cost Allocation Plan is a set of documents that relate to a process where Indirect Costs are allocated using a set of allocation methods to benefiting Cost Objectives
  • The Purposes of a Cost Allocation Plan are as follows:
    • They are often the only way to determine the total cost of operating programs
    • They allow an organization to ensure that it is recovering all allowable costs incurred by the organization
    • They can provide valuable management data to an organization regarding funding levels and time spent on activities (when time and effort reporting is also employed)

Indirect Cost Rate Proposal

  • Indirect Cost Rate Proposal (ICRP): the documentation prepared by an organization to substantiate its claim for the reimbursement of indirect costs. The proposal is the basis for establishing an indirect cost rate agreement

Direct Allocation Method

Treat all costs as "Direct Costs" except General Administration and General Expenses

  • Three basic categories:
    • General administration and general expenses
    • Fundraising
    • Other Direct Functions
  • Prorate joint costs individually as "Direct Costs" to each category and to each award or other activity using an appropriate base for the cost being prorated
    • Relative benefits received
    • Reasonable criteria
    • Supported by current data
  • Indirect Costs consist exclusively of general administration and general expenses
    • Compute indirect cost rate using Simplified Allocation Method

Special Indirect Cost Rates

Special Indirect Cost Rates may be required for a particular segment of work based on:

  • The physical location of the work
  • The level of administrative support required
  • The nature of the facilities or other resources employed
  • The scientific disciplines or technical skills involved
  • The organizational arrangements involved
  • Or a combination of the above

Cost Allocation Plan Process

  • Information Requirements:
    • Organization Chart
    • Chart of Accounts
    • Expenditure Detail
    • Payroll Data
    • Direct Charges
    • Interviews with Staffs
    • Statistical Data/Metrics
    • Grants Inventory (Schedule of Expenditure of Federal Awards)

Salaries and Wages Documentation

  • Payroll - Charges to awards for salaries and wages, whether treated as direct costs or indirect costs, will be based on documented payrolls approved by a responsible official(s) of the organization (subparagraph 8.m.(1) of Appendix B to 2 CFR Part 230)
  • Personnel Activity Reports (PARs) - The distribution of salaries and wages to awards must be supported by personnel activity reports (subparagraph 8.m.(1) of Appendix B to 2 CFR Part 230)

Personnel Activity Reports (PARs)

  • PARs reflecting the distribution of activity of each employee must be maintained for all staff members (professional and nonprofessionals) whose compensation is charged, in whole or in part, directly to awards.
  • PARs must also be maintained for other employees whose work involves two or more functions or activities in order to support the allocation of indirect costs.
    • e.g., an employee engaged part-time in indirect cost activities and part-time in a direct function
  • PARs maintained by non-profit organizations must:
  • Reflect an after-the-fact determination of the actual activity of each employee
    • Budget estimates do not qualify as support for charges to awards
  • Account for the total activity for which employees are compensated and which is required in fulfillment of their obligations to the organization
  • Be signed by the individual employee that the distribution of activity represents a reasonable estimate of the actual work performed by the employee during the periods covered by the report
    • May be signed by a responsible supervisory official having first hand knowledge of the activities performed by the employee
  • Be prepared at least monthly and must coincide with one or more pay periods

How does cost allocation impact my program?

Passing through all allowable administration costs to subrecipients limits:

  • Program support staff including fiscal, contract administration, information systems and maintenance and program monitoring;
  • GRF funding is then used to cover these costs.


  • OMB Circular A-122, "Cost Principles for Non-Profit Organization"
  • OMB Circular A-110, "Uniform Administrative Requirements for Grants and Agreements with Institutions of Higher Education, Hospitals, and Other Non-profit Organizations"
  • OMB Circular A-133 "Audits of States, Local Governments, and Non-Profit Organization."
  • ASMB C-5, "A Guide for Nonprofits"
  • 45 CFR Part 74, "Uniform Administrative Requirements for Awards and Subawards to Institutions of Higher Education, Hospitals, Other Nonprofit Organizations, and Commercial Organizations; And Certain Grants and Agreements with States, Local Governments and Indian Tribal Governments" - U.S. HHS Implementing Regulations for OMB A-110.
  • Internet Sites:
  • OMB Circulars -
  • HHS Cost Policy Issuances-
  • CFR Sections -

Questions and Answers

Question/Discussion and Answers