Cost Determination Guidelines
- Cost Accounting Standards (CAS) Exception Request Form
- Cost Principles
- Definitions (reasonable, allocable, allowable; direct costs vs F&A costs)
- Consistent treatment of costs
- Determination of direct cost or F&A cost
- Distribution of direct costs
- Responsibility for determination
- Unlike circumstances
The purpose of this guideline is to provide information to assist in determining allowability of costs on sponsored programs, including reasonableness and allocability. Further, this guideline provides information and direction in the consistent treatment of costs as either a direct cost or an F&A (indirect) cost.. Per Montana University System Board of Regent Policy 404 – Indirect Cost Recovery Rate, the University seeks to recover all Facilities & Administrative (F&A) allowed by the sponsor. As a result, the University may allow direct costing for non-federal funds that may be considered indirect for federal funds per A-21.
This guideline takes into account the unique needs and requirements of the University’s research community while establishing guidance to ensure compliance with special cost principles required by the federal, state and university rules and regulations:
- OMB Circular A-21, Cost Principles for Educational Institutions, which includes the federal Cost Accounting Standards (CAS). A-21 provides principles for determining costs applicable to research and development, training, and other sponsored work performed by the University on federally-funded sponsored agreements.
- OMB Circular A-110, Uniform Administrative Requirements for Grants and Other Agreements with Institutions of Higher Education, Hospitals and Other Non-Profit Organizations. OMB A-110 outlines requirements for written procedures for determining the reasonableness, allocability, and allowability of federally-funded award costs.
- University's Cost Accounting Standards Board (CASB) Disclosure Statement (DS-2), required by OMB A-21 C.14 for universities receiving over $25 million in federal funding.
- University's Facilities and Administrative (F&A) cost agreement with the federal government.
Future modifications to this and other internal policies may be necessary as further adjustments and interpretations are issued by the federal government.
Project costs may be considered reasonable if the nature and amount of the goods or services acquired or applied reflect a prudent person's decision under similar circumstances to incur such costs. (See OMB Circular A-21 Section C.3 for major considerations involved in the determination of the reasonableness of a cost.)
Allocable costs are expenses which may be assigned or charged to one or more sponsored project cost objectives, in accordance with the relative benefits received or other equitable relationship. To be allocable, project costs must advance, benefit, or be necessary for the sponsored agreement. (See OMB Circular A-21, Section C.4.)
A cost may be charged to a sponsored agreement only if it meets all of the following criteria:
- It must be a reasonable cost,
- It must be allocable to the sponsored program,
- It must be treated consistently, through the application of generally accepted accounting principles, and
- It must be within the type and dollar amount limitations specifically defined in the particular contract or agreement and Circular A-21, if appropriate.
The Additional Information Request Form may be used to provide documentation to clarify the allowability of costs.
D. Direct Costs
Direct costs are defined as costs that can easily and with a high degree of accuracy be identified with or assigned specifically to one of the following:
- A particular sponsored project,
- An instructional activity,
- Any other institutional activity.
A cost is considered direct when a specific grant or contract gains explicit benefit from the cost for a specific programmatic purpose. For example, when a PI's activity involves scientific effort on a particular grant or contract, his or her salary is an allowable direct cost to that grant or contract.
E. Facilities and Administrative (F&A) Costs
Facilities and administrative costs (F&A costs) are those that are incurred for common or joint objectives and therefore cannot be identified readily and specifically with a particular sponsored project, an instructional activity, or any other institutional activity. (A-21, Section E.1)
Consistent treatment of costs is a basic cost accounting principle. Federal guidelines specifically require consistency to ensure that the same types of costs are not charged to grants and contracts as both direct and facilities & administrative (F&A) costs. This requirement ensures that the federal sponsor is not paying twice for the same costs in like circumstances. (See OMB Circular A-21 and Cost Accounting Standard 502 (OMB Circular A-21, Section C.11.a))
University departments must consistently treat costs incurred for the same purpose, in like circumstances, as either direct or F&A costs. Where the University treats a particular type of cost as a direct cost of sponsored agreements, all costs incurred for the same purpose, in similar circumstances, must be treated as direct costs. (See OMB Circular A-21, Section D.1 for federal guidance.)
Application To Sponsored Programs
Identification with the sponsored work rather than the nature of the goods and services involved is the determining factor in distinguishing direct from F&A costs of sponsored agreements. Typical costs charged directly to a sponsored agreement are the compensation of employees for performance of work under the sponsored agreement, including related fringe benefit costs to the extent they are consistently treated, in like circumstances, by the University as direct rather than F&A costs; the costs of materials consumed or expended in the performance of the work; and other items of expense incurred for the sponsored agreement, including extraordinary utility consumption. The cost of materials supplied from stock or services rendered by specialized facilities or other institutional service operations may be included as direct costs of sponsored agreements, provided such items are consistently treated, in like circumstances, by the University as direct rather than F&A costs, are charged under a recognized method of computing actual costs, and conform to generally accepted cost accounting practices consistently followed by the University. (See OMB Circular A-21, D.2)
Facilities and Administrative (F&A) Costs
F&A costs are those that are incurred for common or joint objectives and therefore cannot be identified readily and specifically with a particular sponsored project, an instructional activity, or any other institutional activity. F&A costs are synonymous with “Indirect Costs”, as used in portions of A-21 and in UM policies and forms. See A-21 Section F.1 for a discussion of the components of F&A costs.
Normally, F&A costs (often referred to as indirect costs or overhead) are those costs which accrue from the general operation of the University. Such costs normally are classified under the following categories:
- Depreciation and use allowances,
- General administration and general expenses,
- Sponsored projects administration expenses,
- Operation and maintenance expenses,
- Library expenses,
- Departmental administration expenses, and
- Student administration and services.
OMB Circular A-21, Section C.4.d.(3) provides two methods for allocating an allowable direct cost to two or more sponsored projects: the proportional benefit rule and the interrelationship rule.
A. Proportional Benefit Rule
The proportional benefit rule applies when a cost benefits two or more projects or activities in proportions that can be determined without undue effort or cost. The department allocates the cost according to the proportion of benefit provided to each project.
Example: The department might allocate the cost of laboratory supplies based upon the quantity used (or planned to be used) on each project.
B. Interrelationship Rule
The interrelationship rule applies when a cost benefits two or more projects or activities in proportions that cannot be determined because of the interrelationship of the work involved. The department distributes the cost on any reasonable basis because the proportional benefit cannot be quantified and identified to the individual projects.
Example: The department might allocate the cost of laboratory supplies based upon the allocation of employee salaries to each project.
The following criteria must be met when allocating allowable direct costs based on either the proportionate benefit rule or the interrelationship rule.
- The benefit of the cost should be identified specifically with the sponsored project(s) relatively easily with a high degree of accuracy.
- The department must maintain credible documentation to explain the method of allocation.
- General administrative costs normally are not allocated to one or more sponsored projects unless they meet the criteria in 4.03 and 4.04 below.
In order to be allowable, a cost must be treated consistently as either a direct or an F&A cost in like circumstances. The following guidelines provide additional guidance in determining the consistent treatment of a cost. (A-21, F.6.b.)
Normal F&A Costs Treated as Direct Costs
The following guidelines apply to the determination of departmental administrative costs as direct or F&A costs. (A-21, F.6.b). When budgeting proposals, complete the Cost Accounting Standards (CAS) Exception Request to request treatment of F&A costs as direct costs,
A. In developing the departmental administration cost pool, special care should be exercised to ensure that costs incurred for the same purpose in like circumstances are treated consistently as either direct or F&A costs. For example, salaries of technical staff, laboratory supplies (e.g., chemicals), telephone toll charges, animals, animal care costs, computer costs, travel costs, and specialized shop costs shall be treated as direct cost wherever identifiable to a particular cost objective. Direct charging of these costs may be accomplished through specific identification of individual costs to benefiting cost objectives, or through recharge centers or specialized service facilities, as appropriate under the circumstances.
B. The salaries of administrative and clerical staff should normally be treated as F&A costs. Direct charging of these costs may be appropriate where a major project or activity explicitly budgets for administrative or clerical services and individuals involved can be specifically identified with the project or activity. "Major project" is defined as a project that requires an extensive amount of administrative or clerical support, which is significantly greater than the routine level of such services provided by academic departments. Some examples of major projects are described in A-21 Exhibit C and in Section 4.03 A-F below.
C. Items such as office supplies (including computers and related hardware/software), postage, local telephone costs (including line charges, installation, port charges), and memberships shall normally be treated as F&A costs.
Criteria for Direct Charging Costs Normally Treated as F&A
These types of costs may be directly charged only if they meet the following requirements:
A. The costs can be specifically identified to the work conducted under the project, and the proportionate benefit of the cost can be allocated to the project relatively easily with a high degree of accuracy.
B. The special, unlike circumstance is noted and explained on the UM Checklist.
C. The costs are explicitly included in the sponsor-approved budget of the sponsored agreement, and the special, unlike circumstances requiring direct charging are justified in the proposal.
D. The sponsoring agency accepts the cost as part of the projects direct cost budget; i.e., the sponsor does not specifically disapprove the cost in the award or in other notices it gives to the University. (If not approved in the sponsor-approved budget, separate written approval will need to be obtained from the sponsor.)
The following are examples noted in A-21 Exhibit C of "major projects" where direct charging of administrative or clerical staff salaries may be appropriate.
A. Large, complex programs such as general clinical research centers, primate centers, program projects, environmental research centers, engineering research centers, and other grants and contracts that entail assembling and managing teams of investigators from a number of institutions.
B. Projects which involve extensive data accumulation, analysis and entry, surveying, tabulation, cataloging, searching literature, and reporting (such as epidemiological studies, clinical trials, and retrospective clinical records studies).
C. Projects that require making travel and meeting arrangements for large numbers of participants, such as conferences and seminars.
D. Projects whose principal focus is the preparation and production of manuals and large reports, books and monographs (excluding routine progress and technical reports).
E. Projects that are geographically inaccessible to normal departmental administrative services, such as research vessels, radio astronomy projects, and other research field sites that are remote from campus.
F. Individual projects requiring project-specific database management; individualized graphics or manuscript preparation; human or animal protocols; and multiple project-related investigator coordination and communications.
Direct charging of costs normally treated as F&A costs may also be appropriate in the following unlike circumstances:
G. Privately sponsored projects that are proposed and awarded for a different purpose than federal awards – the work performed is in part for the benefit of the industrial/commercial sponsor and the University. The sponsor’s concern is with total costs and not whether the costs are direct or F&A costs. Private sponsors include private industry, commercial sponsors, foundations, and non-profits.
H. Projects funded by private, state, or federal sponsors where F&A costs are limited or not allowed by the sponsor as this would constitute an unlike circumstance. Consequently, costs normally treated as F&A costs could be treated as direct costs provided they are reasonable and meet the allowability criteria in 1.04.C. above. This is not applicable if reduced or waived by the University.
I. Training, instructional, and/or outreach projects that may require office type supplies for educational purposes.
The following are examples of unique circumstances justifying direct charges:
- Office supplies/postage: Envelopes used to mail an unusually large number of research questionnaires.
- Basic local telephone service on campus: A hotline or crisis line that is specifically required by a grant or contract.
- Memberships: A membership in a professional or scientific organization if joining is the only means of obtaining a specific service or good that is directly related to a grant or contract.
These examples are not exhaustive nor are they intended to imply that direct charging of administrative or clerical salaries would always be appropriate for the situations illustrated in the examples. For instance, the examples would be appropriate when the costs of such activities are incurred in unlike circumstances, i.e., the actual activities charged direct are not the same as the actual activities normally included in the institution's facilities and administrative (F&A) cost pools or, if the same, the indirect activity costs are immaterial in amount.
It would be inappropriate to charge the cost of such activities directly to specific sponsored agreements if, in similar circumstances, the costs of performing the same type of activity for other sponsored agreements were included as allocable costs in the University's F&A cost pools. Application of negotiated predetermined F&A cost rates may also be inappropriate if such activity costs charged directly were not provided for in the allocation base that was used to determine the predetermined F&A cost rates.
|DIRECT COSTS||F&A (INDIRECT) COSTS|
|Salaries, Wages, Benefits||- Principal Investigator
- Research Associates
- Laboratory Technicians
- Graduate Research Assistants
|- Departmental administrative & clerical support staff
- Central administrative & clerical support staff
|Computers & Software||Computers and software must be project specific, such as those used in laboratories or in the field to collect data. Additional documentation may be needed to determine allocability.||General purpose computers and software, such as those used in offices whose benefit cannot be allocated to any specific project.|
|Supplies||Supplies must be project specific. Extra care must be taken to correctly code supply purchases. For example, notebooks and paper for workshop participants should be coded as a training supply (62223) rather than an office supply (62241). Additional documentation may be needed to determine allocability.||General purpose supplies, such as those used in offices whose benefit cannot be allocated to any specific project.|
|Communications (phone, cell, fax, data ports, etc.)||Long distance calls that are directly related to a project. Departments must maintain documentation such as a log or access code records. Basic services may be allowable in unusual circumstances where the benefit can be directly allocated to the project (s). Additional documentation will be required to determine the basis for allocating the benefit.||Basic communication services that supports general departmental activities and whose benefit cannot be allocated to any specific project.|
|Equipment Maintenance||Maintenance contracts or repairs for equipment that is used specifically for one (or a few) projects. If split among multiple projects, additional documentation will be needed to determine allocability.||Maintenance contracts or repairs for equipment that is used for numerous projects and the benefit cannot be allocated to any specific project (for example a departmental copier or an electron microscope in a core facility.)|
|Memberships & Subscriptions||Memberships that may be required in order to obtain a particular service or benefit that is directly related to the project. Additional documentation may be needed to explain the benefit to the project.||Journal subscriptions or membership in professional societies where the benefit is broad across a particular discipline, such as the Journal of Applied Physics or the American Psychological Association.|
|Shipping & Postage||Postage, shipping, or freight that is project specific (for example shipping samples for analysis). Additional documentation may be needed to determine allocability.||General purpose postage that supports general departmental activities whose benefit cannot be allocated to any specific project.|