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