Fundamental Cost Principles

Understanding the Fundamental Cost Principles is essential to managing your award successfully.  Federal regulation can be found at Guiding Principles – OMB Uniform Guidance Subpart E – Cost Principles.

Here are the basics:

Total Project Costs = allowable direct costs (DC) + allowable indirect costs (IDC, or facilities and administrative costs F&A)

Costs must be:

  • Allowable
  • Allocable
  • Reasonable
  • Consistently treated

What is Allowable?

  • Must be reasonable;
  • Allocable to sponsored agreements
  • Consistently treated
  • Conform to sponsored agreement
  • Sponsored agreement takes precedent over cost principles

What is Allocable?

  • Item can be assigned (allocated) to an activity or function
    • In proportion to the benefit received
      • Direct costs: exclusive benefit to project or can be assigned to multiple projects in proportions that can be approximated through reasonable methods.
      • Indirect costs: benefit many projects or activities, can’t be reasonably assigned.

What is Reasonable?

  • When you bought the item at price X and quantity Y
    • You acted prudently; others would have made similar decision given facts and circumstances at the time the decision was made, i.e.:
      • necessary
      • followed good business practices and applicable laws and regulations, and sponsored agreement terms and conditions
      • acted prudently given the circumstances
      • followed institutional policies

What is Consistently Treated?

  • Like costs, must be treated the same for similar purposes
  • If in F&A pool, there it stays, UNLESS cost is not for same kind of purpose
  • If allocated to one activity/project, can’t shift to another activity
  • If charged to one award, can’t shift to another because there’s money in the other pot. (Spending down the award is not allowable!)

What is Allowable as a Direct Cost:

  • Needed to support project
  • Cost to sponsor in proportion to benefit received
    • They pay the whole cost, they are the sole beneficiary

What is Allowable in F&A  (not Direct Cost)

  • Needed to support many projects.
  • Not reasonable to assign proportion of benefit, including but not limited to
    • Secretary/clerical (cost of doing business)
    • Office supplies (cost of doing business)
    • Local phone calls (cost of doing business)

What about Food?

  • Food is considered entertainment (OMB Uniform Guidance Part 200.438) and is not allowable
  • Unless for a conference/meeting (OMB Uniform Guidance Part 200.432)
    • Purpose: disseminate sponsor’s results (Remember: How does expenditure allow you to achieve the project’s objectives?)
    • Characteristics of meeting: formally announced, agenda, list of attendees, minutes, proceedings, etc.
      • This documentation should be available for inspection to justify expenditure
      • If not in budget justification, sponsor approval should be obtained

Core Questions to consider when using award funds:

  • How does purchase/expenditure (as DC) help accomplish the project’s objectives?
  • If cost is administrative (i.e., generally in IDC/F&A), how is the need in this specific situation non-routine, unlike?
  • Is item not-allowed in agreement?
  • Is prior approval necessary? (e.g. international travel)
  • If prior approval needed and not obtained, cost will not be allowed
  • Is it a reasonable purchase?
  • DOCUMENTATION:  How purchase advances project’s objectives (i.e. allowable, reasonable, necessary, allocable, consistently treated)
    • If not in budget justification,
    • Then justification should ordinarily be included in purchase requisition