Welcome to Feldesman's Grants Practice Shorts series where we discuss helpful tips and strategies in common areas of federal grant management. Be sure to check out our other installments on our Grants Practice Shorts page.
Grantees incur a variety of costs in implementing their approved scope of project under a Federal award. However, not all of those costs may be recovered through grant funding. The federal government is only willing to reimburse certain costs – those which are considered "allowable." Whether a cost is allowable is governed by the federal cost principles in the Uniform Guidance, codified at 2 C.F.R. Part 200, Subpart E. There are two portions of the cost principles: (i) general standards that each cost must meet to be allowable, and (ii) the "Selected Items of Cost," a detailed list of various types of costs, including a number of customary business expenses, for which additional specific guidance has been promulgated. See §§ 200.400−200.476.
General Allowability Standards
A cost is only an allowable charge against a federal award if it is (i) necessary and reasonable, (ii) allocable to the project, and (iii) adequately documented. § 200.403. A cost is generally necessary and reasonable if it furthers the purpose of the project and is reasonable in both nature and amount. § 200.404. The cost principles explain that reasonable costs are those that a "prudent person would incur under the circumstances prevailing" at the time the cost was incurred. Id.
How a cost is adequately documented varies by type of expenditure as well as its amount. Generally, an agency or auditor will expect documentary evidence that the cost was incurred, and that value was obtained in return for the expenditure. Grantees may support grant-funded expenditures through source documentation such as cancelled checks, paid bills, payrolls, time and attendance documentation, procurement documentation and contracts, as well as subaward documents (if applicable).
Some expenses, such as costs of personnel compensation, entail specific supporting documentation requirements. See §§ 200.430 and 200.431.
Selected Items of Cost
Following the general standards are the "Selected Items of Cost." They set forth more detailed requirements for various specific expenditure types. See §§ 200.420−200.476.
The additional requirements or restrictions fall generally within five categories: (i) outright prohibitions against certain costs such as alcoholic beverages, bad debts and entertainment (§§ 200.423, 200.426 and 200.438); (ii) designated valuation of certain costs (for example, § 200.465 referencing rental costs of real property and equipment); (iii) designated accounting treatment for certain costs, such as depreciation or proposal costs (§§ 200.436 and 200.460); (iv) prior approval requirements (for example, § 200.439 regarding equipment and other capital expenditures); and (v) special documentation requirements (for example, as noted above, § 200.430(g), standards for documentation of personnel expenses).
Familiarity with specific limitations and documentation requirements in selected items of cost is a key strategy for mitigating risks of incurring unallowable costs that may trigger a disallowance under a federal grant.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
