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.
Last week we addressed allowable costs under Federal grants; we now turn to allocability of costs. The concept of a cost being "allocable" is essentially that, in whole or in part, the cost benefits the federally funded project. See 2 C.F.R. § 200.405(a).
Allocable Costs in General
Some costs are easy to identify as allocable because they are incurred exclusively in relation to the federal project. § 200.405(a)(1). An example would be the salary of a Project Director that the grantee employs to manage a particular federally funded project, and who does nothing else with his or her work time.
Some costs, however, are more difficult to identify as allocable because they either benefit both the federal project and other activities or because they benefit the federal project only in the sense that they are necessary to the overall operations of the grantee. § 200.405(a)(2)−(3). Examples of such costs may be the cost of personnel who work in furtherance of a federal project and other work, the cost of maintenance for equipment (such as vehicles) used for multiple projects, or the cost of an organization's executive personnel, human resources department, or information technology department.
Direct vs. Indirect Costs
The cost principles divide costs into two broad categories, "direct costs" and "indirect costs." § 200.412 (Classification of costs). Direct costs are those costs which "can be identified specifically with a particular final cost objective . . . or that can be directly assigned to such activities relatively easily with a high degree of accuracy." § 200.413(a) (Direct costs). Indirect costs are those costs which have been "incurred for a common or joint purpose benefitting more than one cost objective, and [are] not readily assignable to the cost objectives specifically benefited, without effort disproportionate to the results achieved." § 200.1 (definition of "indirect costs").
As recognized in the above definitions, direct costs may be subdivided into two subcategories, resulting in three overall cost types: (i) direct costs associated only with a single cost objective, (ii) joint costs apportioned and charged directly to benefiting cost objectives, and (iii) joint costs charged as indirect costs. Every cost incurred by an organization, regardless of the complexity of the organization's structure, can be conceptualized as falling into one of these three categories.
Joint Costs
Whether the costs described herein as "joint costs apportioned and charged directly" should be termed "indirect costs" or "direct costs" is ambiguous in the Uniform Guidance. Herein they are simply termed "joint" costs. Regardless, the Uniform Guidance makes clear that apportionment of joint costs, and assignment of those costs to benefiting cost objectives through some individualized allocation base is permissible so long as the costs "can be distributed in proportions that may be approximated using reasonable methods." Id. § 200.405(a)(2). Further, the Uniform Guidance makes clear that where distributing such costs through such individual allocation methods would result in effort disproportionate to the results, the costs can simply be "any reasonable documented basis." Id. § 200.405(d).
Allocation of Costs
The above distinctions show that the process of determining the allocability of costs charged to a federal award must necessarily begin by (i) identifying all the typical costs an organization incurs in its operations, and (ii) conceptualizing one's organization in terms of activities or groups of activities that benefit from those various costs.
The benefiting activities or groups of activities are termed for purposes of cost allocation "cost centers" or "cost objectives." § 200.1 (definition of "cost objective"). Costs must ultimately be assigned to "final cost objectives," such as a federally funded project or other activity and absorbed by an appropriate source of funds for that cost objective – for the federal project, such source would generally be the federal grant. The end result is that all organizational costs are assigned (i.e., allocated) to benefiting activities, so all are absorbed by (and only by) appropriate funding sources. See § 200.1 (definitions of "final cost objective" and "intermediate cost objective").
The means by which costs are assigned to final cost objectives can be more or less complex depending upon the nature of the cost (direct cost, directly charged joint cost, or indirectly charged cost) and depending upon the size and complexity of the organization incurring the cost.
Flexibility and Consistency of Approach
While grantees have a degree of flexibility in choosing what costs they allocate as directly charged joint costs and what costs they allocate as indirectly charged costs, they are required to consistently apply their chosen approach. As explained in the Uniform Guidance:
"There is no universal rule for classifying costs as either direct or indirect (F&A) under every accounting system. A cost may be direct with respect to some specific service or function, but indirect with respect to the Federal award or other final cost objective. Therefore, it is essential that each item of cost incurred for the same purpose be treated consistently in like circumstances either as a direct or an indirect (F&A) [Facilities & Administration] cost in order to avoid possible double charging of Federal awards." § 200.412 (Classification of costs).
Grantees may recover costs that benefit multiple activities through direct allocation and various indirect cost rate approaches. The approaches are not mutually exclusive: some joint costs may be recovered by directly allocating them, while others are recovered through an indirect cost rate, so long as the grantee's approach: (i) treats like costs in like circumstances consistently and (ii) avoids charging the same cost twice. See § 200.403(d)−(f).
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.
