Allowable Costs on Federal Grants: What 2 CFR 200 Requires

The allowable cost rules in 2 CFR Part 200 are the framework that determines whether a federal grant expenditure is legitimate. Every dollar charged to a federal award must survive scrutiny against these standards — not just at audit, but as a continuous practice throughout the grant period.

The Three Cost Tests

Every cost charged to a federal grant must pass three tests simultaneously. A cost that passes two tests but fails one is disallowable.

Test 1: Allowability

A cost is allowable if it is:

• Permitted under the specific terms of the award (check the notice of award and any program-specific terms and conditions)
• Not explicitly prohibited by 2 CFR 200.420–200.475 (the specific cost principles section)
• Not prohibited by any other applicable federal statute or regulation
• Not prohibited by organizational policy that binds federal expenditures

The allowability determination is binary — a cost either is or is not permitted. If the notice of award says no indirect costs, no indirect costs are allowable regardless of your NICRA or the de minimis rate.

Test 2: Allocability

A cost is allocable to a specific grant if the grant actually benefited from that cost. This is a proportionality test: if a staff member works 40% of their time on Grant A and 60% on other activities, 40% of their salary is allocable to Grant A. If an office supply purchase was used entirely for program activities unrelated to Grant A, none of the cost is allocable to Grant A even if it is otherwise allowable.

Common allocability errors:

• Charging 100% of a shared cost to a single grant when multiple programs benefited
• Allocating costs to a grant based on administrative convenience rather than actual benefit
• Charging overhead costs directly when they should be recovered through the indirect cost rate
• Charging costs from before the grant period began

Test 3: Reasonableness

Reasonableness is a judgment standard: would a prudent person pay this amount for this good or service in the ordinary course of business? The test is applied from the perspective of someone managing the organization’s resources carefully, not subject to federal requirements.

Factors that inform the reasonableness determination:

• Whether the price was established through competitive procurement
• Whether comparable goods or services are available at lower cost
• Whether the cost is consistent with what the organization typically pays for the same item
• Whether the quantity purchased matches actual program needs

A cost that is technically allowable can still be disallowed in part if the amount is unreasonable. Paying above-market rates for contracted services, purchasing equipment that exceeds program requirements, or procuring without competitive quotes for purchases above the micro-purchase threshold can all produce partial disallowances based on reasonableness.

Direct Costs

Direct costs are those you can tie to a specific grant with a high degree of accuracy. Examples:

Personnel: Salary and fringe benefits of staff who work on the grant-funded program. The portion allocated to the grant must reflect the actual time spent on grant activities, documented through effort reporting or time-and-activity records.

Supplies: Consumable materials purchased and used for the grant program. A receipt and a notation that the supplies were for the grant is the minimum documentation.

Contractual services: Payments to vendors or contractors performing work on the grant. Requires a written agreement, scope of work, and invoices showing the basis for payment.

Travel: Costs for staff travel directly related to grant activities. Must comply with organizational travel policy and 2 CFR 200.474 (using the lower of actual cost, mileage reimbursement at the federal rate, or per diem for meals).

Equipment: Items with a unit cost at or above your organization’s capitalization threshold (minimum $5,000 under Uniform Guidance) purchased primarily for grant activities. Equipment purchases typically require prior approval if not already included in the approved budget.

Participant support costs: Stipends, training allowances, transportation subsidies, and similar costs paid directly to program participants. Cannot be moved to other budget categories without prior approval.

Indirect Costs

Indirect costs are organizational overhead that supports multiple programs but cannot be tied to any one grant with precision. The recovery mechanism is the indirect cost rate — either a negotiated rate agreed with the cognizant federal agency (the NICRA) or the 10% de minimis rate available to organizations that have never had a NICRA.

Common indirect cost categories:

• Occupancy (rent, utilities, building maintenance)
• Central administration (HR, finance, executive functions)
• General supplies and communications
• IT infrastructure and support

The key compliance requirement: consistent treatment. If you charge a cost type as direct to one grant, you cannot charge the same cost type as indirect to another grant in the same period. 2 CFR 200.412 prohibits this inconsistent treatment.

Explicitly Unallowable Cost Categories

The following costs are never allowable on federal grants and cannot be recovered directly or through the indirect cost rate:

Alcoholic beverages (2 CFR 200.423): Any cost for alcoholic beverages. No exceptions. This applies to beverages served at events funded by the grant even if the event itself is allowable.

Entertainment (2 CFR 200.438): Costs for entertainment, amusements, social activities, and related costs. The fact that grant staff attend a team event does not make the cost allowable. Note: conferences and training events are separate from entertainment — the food and beverage costs associated with a legitimate grant-funded training may be allowable as a program cost, not entertainment.

Lobbying (2 CFR 200.450): Costs associated with influencing federal, state, or local legislation, election campaigns, or rulemaking. This includes staff time spent on lobbying activities even if other staff time is allowable. Nonprofits with lobbying programs must maintain clear separation between grant-funded activities and lobbying activities.

Fundraising (2 CFR 200.442): Costs for campaigns to raise funds for the organization, including direct mail appeals, special events for fundraising purposes, and the administrative costs of running a development function. Note that proposal writing for new federal grants is allowable if treated as an organizational indirect cost.

Bad debts (2 CFR 200.426): Uncollectible accounts or notes receivable cannot be charged to federal awards.

Fines and penalties (2 CFR 200.441): Any fine or penalty imposed by a government entity — including OSHA violations, parking tickets on organizational vehicles, or regulatory penalties — is unallowable.

Contributions and donations made by the grantee (2 CFR 200.434): Your organization’s own charitable contributions, donations to other nonprofits, and similar outgoing contributions cannot be charged to federal grants.

Documentation Standards for Borderline Costs

Some costs are allowable in principle but require additional documentation because of their borderline nature:

Business meals: Allowable if they are directly associated with conducting grant business — not general staff meals. Document the business purpose, the individuals present, and the connection to grant activities. Keep the receipt.

Conference and training costs: Allowable if the conference or training is directly related to grant activities and registration fees are reasonable. Document the connection to the grant and retain registration receipts.

Shared equipment and supplies: When an item is used on both the grant and other organizational programs, the cost must be allocated based on actual use. A simple pro-rata allocation based on use logs is adequate for most audits.

The general documentation principle: if you had to explain the cost to a skeptical auditor who has never heard of your organization, what would you need to show them? Write that down at the time of the transaction. Documentation assembled retroactively is treated with far less deference.