Cost Determination Guidelines
- Cost Principles
- Cost Allowability (reasonable, allocable, allowable)
- Direct vs F&A Costs
- Allocating expenses to two or more sponsored awards
- Responsibility for determination
- Circumstances where direct charging may be appropriate
- Documentation Required to Direct Charge Costs That are Typically F&A Costs
This guideline provides information to assist in determining allowability of costs on sponsored programs, including reasonableness and allocability, as well as direction regarding the consistent treatment of costs as either a direct cost (project-specific cost) or an F&A cost (general use items routinely purchased/provided by the University).
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.
Cost principles required by the federal, State and University rules and regulations:
- 2 CFR 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (effective Dec. 26, 2014).
- 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 and 2 CFR 200.419 for universities receiving over $50 million.
- University's Facilities and Administrative (F&A) cost agreement with the federal government.
A cost may be charged to a sponsored agreement only if it meets all of the following criteria:
- 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.C.3 and 2 CFR 200.404)
- Costs must be specific to the project and the proportionate benefit of the cost can be allocated to the project relatively easily with a high degree of accuracy.
- Costs must advance, benefit, or be necessary for the sponsored agreement. 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. (See OMB Circular A-21.C.4. and 2 CFR 200.405.)
- Treated consistently
- Costs must consistently treated through the application of generally accepted accounting principles, Federal guidelines specifically require consistency to ensure that the same types of costs are not charged to grants as both direct (project specific) and F&A costs (general use items routinely purchased/provided by the University). This requirement ensures that the federal sponsor is not paying twice for the same costs in like circumstances. (A-21.C.11.a. and 2 CFR 200.403)
- University departments must consistently treat costs incurred for the same purpose, in like circumstances, as either direct or F&A costs. 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. 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.
- For example, 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, and are charged under a recognized method of computing actual costs and conform to generally accepted cost accounting practices consistently followed by the University.
- Conform with the terms and conditions of the award.
During award management, OSP may correspond via email or request the Additional Information Request Form be provided to clarify the allowability of a specific cost. Should an expenditure later be determined to be unallowable by the sponsor, it will be the responsibility of the PI and department.
Direct costs are integral and essential to the successful completion of a project. Such costs are project-specific and can easily and with a high degree of accuracy be identified with or assigned specifically to an activity and charged in an appropriate proportion of benefit. Thus, when a sponsored project benefits from a cost for a specific programmatic purpose, it is considered a direct cost. Typical costs directly charged to a sponsored agreement are:
- compensation of employees for performance of work under the sponsored agreement, including related fringe benefit costs;
- costs of materials consumed or expended in the performance of the work; and,
- other items of expense incurred for the sponsored agreement.
Facilities and Administrative (F&A) Costs
F&A costs (often referred to as indirect costs or overhead) support common or joint objectives (e.g., fixed phone, general purpose office supplies, network ports), routinely purchased/provided by the University, and cannot be specifically identified with a particular sponsored project, an instructional activity, or any other institutional activity. (A-21, Section E.1 and 2 CFR 200.414.)
An institution's F&A Rate Agreement provides a mechanism to recover and reimburse the institution for these services/facilities. Therefore, on projects recovering full F&A, budgeting or charging for indirect cost items as direct costs is seldom allowable as the sponsor already "pays" for those items via an institution's F&A Rate Agreement.
Normally, F&A costs are those costs which accrue from the general operation of the University and such costs 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.
These cost pools are used when determining an institution's federally negotiated F&A Rate, the mechanism that assigns the federal government's "fair share" of the cost of carrying out a project so that the institution is able to recover some of the cost of doing business on behalf of the sponsor.
PIs often have multiple concurrent funded projects. Costs must be charged to one or more projects in reasonable proportion to the benefit provided to each project. Allocation is the process of assigning a cost, or a group of costs, to one or more projects, and for a federal proposal allocation best practices are governed by the principles contained in the Uniform Guidance 2 CFR 200.405 (formerly found in OMB Circular A-21, Section C.4.d.(3)).
If an expense solely benefits one project, it should be charged entirely to that project. However, if a cost benefits two or more projects or activities, a split allocation is appropriate and allowable. Be sure to document the basis for the split allocation method that you choose at the time of the cost being incurred. Such a split must also be approved in advance by the Principal Investigator (PI) of the awards to which the costs are allocated. When it is not possible to allocate costs to the benefiting sponsored awards at the time when the goods or services are purchased, costs must be recorded in a non-sponsored account, such as a departmental account, instead of being charged to a specific grant.
Note: If costs are initially recorded in a non-sponsored account, the eventual distribution of these costs to a sponsored award is a cost transfer that must comply with the UM's cost transfer guidelines.
Proportional Benefit Rule
If a cost benefits two or more projects or activities in proportions that can be easily determined, without undue effort or cost, the cost should be allocated to the projects using these proportions.
Example: Two awards require the purchase of mice to conduct experiments. The specific aims for one award indicate that 150 mice are needed to conduct the research, and the specific aims of the second award require 50 mice to conduct the research. The PI orders 200 mice and allocates the cost of the mice 75% / 25% between the awards.
The individual that initiates the allocation transaction must have first-hand knowledge of the benefit to the sponsored project, and/or must have received the appropriate proportional allocation instructions in order to execute the purchase using this method.
The interrelationship rule applies when a cost benefits two or more projects or activities in proportions that cannot be easily determined due of the interrelationship of the work involved. The department distributes the cost on any reasonable methodology, which should logically relate to the type of expense incurred.
Examples of methodologies that can be used as a basis for allocating costs (maintain documentation that details the methodology) include:
- Effort: The cost of lab supplies is allocated based upon the PI’s/lab personnel effort charged to each project.
- FTE: The cost of renting space is allocated based upon the number of FTEs working on each project.
- Number of experiments: The cost of syringes is allocated based upon the number of experiments performed on each project.
- Number of hours: The cost of equipment is allocated based upon the number of hours logged on for each project.
- Sampling: Cost of laboratory supplies is allocated based on actual usage records for a representative sample.
- Square footage: The cost of glasware for the two laboratories that are conducting similar research is allocated based upon the square footage of the two laboratories.
Costs may not be allocated based on:
- Amount of available funds on a given award;
- Budgetary convenience (to accommodate an award that is either over or under budget, budget is ending soon, etc.);
- Avoidance of restrictions imposed by regulations or terms of a given award;
- Offset (costs charged to budget A one-time and budget B the next time).
Allocation methodologies should be periodically reviewed by the PI and DRA to ensure they continue to be appropriate and reasonable. Allocations based on FTE’s must be updated to reflect any changes in headcount or effort. Methodologies based on sampling, surveys, etc., should be reviewed, updated, and approved by the PI at least once each fiscal year and/or when new awards are received.
Please contact your departmentally assigned OSP post-award SPS with any questions regarding the allocation of expenses to sponsored awards.
Federal or Federal Flow-Through Awards
Items such as general purpose office supplies (including computers and related hardware/software), postage, local telephone costs (including line charges, installation, port charges), memberships, and administrative and clerical salaries are normally treated as F&A costs and, therefore, seldom allowable as direct costs on projects recovering full F&A.
Federal Regulations (2 CFR 200.413 (c)) do allow for the direct billing of F&A costs on a federal award.
Direct charging may be allowable when ALL the following conditions are met:
1. Individual costs can be specifically identified with the project or activity;
The cost must be able to be easily identified and recorded. An example would be a large mailing where the cost of mailing supplies and postage for the effort can be identified and recorded as being in support of a single award. A bad example would be tracking of the use of paper (very time consuming and low value).
2. Such costs are explicitly included in the budget or have the prior written approval of the federal awarding agency;
Costs should be clearly identified and noted as an F&A cost being direct billed in the proposal budget and budget notes or proposal. Such identification serves as sponsor approval.
In the event that during the implementation of the award it is determined that an F&A cost needs to be direct billed, written sponsor approval should be obtained prior to the cost being incurred. Such written approval should include identification of the cost and rationale for its direct billing to the award.
For programs that do not require submission of a budget and when the requirement for prior approval of the Federal awarding agency does not apply, because the agency has waived the prior approval requirement, these costs should be supported by department documentation that demonstrates that these costs are integral to the Award.
The department is responsible for maintaining this required documentation.
3. The costs are not also recovered as indirect costs
UM’s calculation of its F&A rate takes into account that there will be direct billing of some F&A costs. Thus, departments do not need to be concerned with this requirement as long as the other three requirements listed here have been met.
4. Administrative Salaries:
Under the guidelines imposed by the U.S. Office of Management and Budget’s Uniform Guidance 2 CFR §200.413(c), administrative and clerical salaries should normally be treated as indirect costs. Direct charging of these costs may be appropriate only if all four of the following conditions are met. If any one of these conditions is not met, the cost of the administrative or clerical salary will be borne by the department.
- Administrative or clerical services are integral to a project or activity, and
- Individuals involved can be specifically identified with the project or activity, and
- Such costs are explicitly included in the budget, or have the prior written approval of the Federal awarding agency when required, and
- The costs are not also recovered as indirect costs.
If the four conditions above are met, the salary expense must be adequately documented, with a description of activities performed, in order to comply with 2 CFR §200.430. The documentation must be retained by the department.
There is flexibility in the type of costs that can be direct charged in unlike circumstances to non-federal awards. University of Montana defines unlike circumstances in this context as the following situations.
1.Non-Federal awards funded with non-federal dollars where the F&A rate is limited by the sponsor.
2. Awards from for-profit entities that are funded by non-federal dollars.
In rare circumstances where costs normally treated as F&A costs are treated as direct costs, documentation justifying the expense may be requested by OSP. One mechanism for such documentation is the Cost Allowability Confirmation form.
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 fixed telephone service (local) 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.
|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
|Supplies (including computers & software)||Supplies, computers, and software 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. General purpose computers and software, 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.|