Administrators and the Responsible Conduct of Research
Tutorial: Allowable, Allocable, Reasonable Costs

Allowable, Allocable, Reasonable Costs:

Many, and perhaps the most familiar, ethical issues concern the expenditure and proper accounting of project costs. Administrative staff need to be consistently careful that costs are allowable under sponsor policies, properly allocated to the correct project, and are considered reasonable. For federal awards, the document that sets forth the basic definitions and rules for both direct costs and Facilities and Administrative costs is OMB Circular A-21 (A-21A-21, OMB Circular
Cost Principles for Educational Institutions (05/10/2004) issued by the U.S. Office of Management and Budget.). It provides guidance on and samples of the types of costs that are allowable under federal projects. For instance, Section C.2 states:

2. Factors affecting allowability of costs. The tests of allowability of costs under these principles are: (a) they must be reasonable; (b) they must be allocable to sponsored agreements under the principles and methods provided herein; (c) they must be given consistent treatment through application of those generally accepted accounting principles appropriate to the circumstances; and (d) they must conform to any limitations or exclusions set forth in these principles or in the sponsored agreement as to types or amounts of cost items.

Section J of A-21 provides 54 examples of types of costs and whether they are allowable to be charged to federally-sponsored projects.

The rules pertaining to the management of federal grants and cooperative agreements can be found in OMB Circular A-110 (A-110A-110, OMB Circular
Uniform Administrative Requirements for Grants and Other Agreements with Institutions of Higher Education, Hospitals and Other Non-Profit Organizations (11/19/1993) (further amended 09/30/1999) – issued by the U.S. Office of Management and Budget.). That document pertains to federal grants and cooperative agreements (assistance awards), but it does not apply to federal contracts. A-110 is organized to address issues that arise in chronological order during the life of an award. After a "General" section, the rest of A-110 is organized as follows:

This format makes it simple to locate specific requirements and answers to questions pertaining to the administration of federal assistance awards.

One should be cautious, however, when dealing with A-21 and A-110. They actually are written as guidance documents from OMB to the other federal agencies. The agencies are then required to implement or codify the provisions of the circulars in their own sets of policies or regulations. Some agencies will incorporate the OMB Circulars virtually verbatim into their policies and regulations, but some may make changes that are significant. Therefore, when one has a questions about whether certain costs are allowable or whether certain administrative actions are required or appropriate, the safest course is to check the terms of the sponsored agreement first, then the sponsor's policies and regulations, and then the text of the relevant OMB Circular.

For non-federal awards, each sponsor will have its own policies and they can vary significantly from one another. They can usually be found on the sponsors' websites, in program announcements, or in printed brochures. It is essential that administrative staff have the sponsors' policies available to them for easy reference.

It is also important to have a copy of each sponsored project award document easily available. The award document may have special terms and not specifically addressed in either of the OMB Circulars or the agency's published regulations that implement the circulars or the sponsor's general policies. Such special terms and conditions can have a significant impact on the financial management of an award. Central administrators should ensure that both the PI and the department administrator are aware of the award's terms and conditions. It is also beneficial for the department administrator and PI to review the award's terms and conditions and agree in advance which project costs will be allowable and which will have to be charged to a non-sponsored budget.

A determination as to which project(s) the cost should be allocated should be made prior to incurring an expense. The PI needs to discuss the allowability of the charge with the department administrator in order to make this decision. If there is any question concerning the allowability of a charge, the PI and/or department administrator should consult the sponsored programs office. Once the charge has been made, then appropriate documentation must be maintained so as to justify the allocability of the expense.

Costs are allowable if they meet the sponsor's definition of the categories of costs that are permissible to be charged to the projects it funds. Further, to meet the test of allocability, costs must be necessary to carry out the scope of the project, and they must be identified specifically with a sponsored project with a high degree of accuracy. Finally, the costs must be what a "prudent person" would consider reasonable for the products or services purchased. It is important to remember that all three tests (allowable, allocable, and reasonable) must be met before charging a given expense to a sponsored project. Being careless in this regard will lead to audit disallowances, and if the inappropriate charges are seen as being willful, charges of fraud can be placed against the university, the Principal Investigator, and administrative staff members.

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