Recipients of Federal funding are required to have solid management practices for administering the award, and have accounting practices that align with cost principles.
Cost Principles, as defined in the Uniform Guidance Subpart E, specify that a cost can be charged to a Federal award only if it is allowable, reasonable, and allocable. In addition, items of cost must be consistently treated by the award recipient.
Factors in Determining Allowability
Allowability of a cost can be determined by answering the following questions:
- Is the cost reasonable and necessary for the program?
- Is the expense in compliance with laws, regulations and grant terms?
- To what extent is the expense allocable to the grant?
- Is the cost adequately documented?
- Is the cost consistent with grantee rules that apply to both Federally funded and non-Federally funded activities?
When Are Costs Reasonable?
"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."
In order to determine if the cost is reasonable, the following questions must be asked:
- Is the cost ordinary and necessary for the program?
- Do sound business practices support the expenditure?
- Are the costs comparable to market prices for comparable goods or services in the geographic area?
- Have all concerned acted with prudence , considering their responsibilities to the organization, community, and others?
How do I Determine Cost Allocability?
Allocable means that good or service can be assigned to an award or cost objective in accordance with the relative benefit achieved. Costs must be charged in proportion to the benefits received, and costs incurred for joint or common objectives are included in the institutional Facilities and Administration (F&A) and cannot be charged to the project.