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Office of Sponsored Programs

Cost Principles and Regulatory Framework

Cost principles establish which expenses are allowable, allocable, reasonable and treated consistently to a project regardless of funding source. 

All costs charged to sponsored awards must comply with applicable federal, state, and University rules and regulations, including: 

  • 2 CFR 200 – Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards  
  • University Cost Accounting Standards Board (CASB) Disclosure Statement (DS-2). Required under 2 CFR §200.419 for universities receiving more than $50 million.
  • University of Montana’s Federally Negotiated Indirect Cost Rate Agreement with our federal cognizant agency.

Costs must be incurred within the period of performance. 

  • Supplies and equipment must be purchased, delivered, and used/consumed before the project end date. 
  • Travel dates must be within the performance period. 
  • Payroll expenses may be incurred through the final day of the period of performance. 

Cost Allowability Standards 

A cost may be charged to a sponsored agreement only if all of the following criteria are met. 

Reasonable

  1. A cost is reasonable if the nature and amount of the goods or services reflect what a prudent person would pay under similar circumstances, 2 CFR §200.404

Allocable

  1. A cost is allocable if it: 
    1. Is specific to the project, 
    2. Provides a direct benefit to the project, and 
    3. Can be allocated to the project with a high degree of accuracy. 

Allocable costs can be charged to one or multiple sponsored projects proportionally to the benefit received, 2 CFR §200.405. 

Treated Consistently

Costs must be managed consistently following generally accepted accounting principles. Federal regulations prevent charging the same cost as both a direct cost and an F&A (indirect) cost in similar cases, making sure the sponsor does not pay twice for the same expense. 2 CFR §200.403. 

University departments must consistently treat costs incurred for the same purpose and under similar circumstances as either direct or F&A costs. Whether a cost is classified as direct or indirect depends on its connection to the sponsored work, not the nature of the good or service. 

For example, materials from stock or services provided by specialized facilities may be charged as direct costs if they are: 

  • Treated consistently in like circumstances, 
  • Charged using a recognized method for calculating actual costs, and 
  • In accordance with generally accepted cost accounting practices. 

Conformance with Award Terms and Conditions

During award management, OSP may request additional information to assess cost allowability. If a cost is later determined to be unallowable by the sponsor, the responsibility for the expense falls on the PI and the department. 

Direct vs. Indirect (Facilities & Administrative (F&A)) Costs 

Direct Costs 

Direct costs are crucial to completing a specific project and can be identified and assigned to the award with a high level of accuracy. A cost is considered direct when it supports a specific programmatic purpose. 

Typical direct costs include: 

  • Salaries and wages for work performed on the project (including fringe benefits), 
  • Materials and supplies consumed during the project, and 
  • Other expenses incurred specifically for the sponsored agreement. 

Indirect Costs (Facilities & Administrative (F&A)) Costs 

Indirect Costs also known as F&A costs or overhead, support shared or common objectives and cannot be directly linked to a specific project. These costs are regularly provided by the University, 2 CFR §200.414. 

The University’s Federally Negotiated Indirect Cost Rate Agreement covers these costs. When a project receives full F&A recovery, charging indirect cost items as direct costs is generally not permitted. 

F&A cost categories include: 

  • Depreciation and use allowances 
  • General administration and general expenses 
  • Sponsored projects administration 
  • Operation and maintenance 
  • Library expenses 
  • Departmental administrative services that are provided on all funds i.e. procard distributions, payroll, etc. 
  • Student administration and services 

These cost pools serve as the foundation for the federally negotiated F&A rate, which reflects the federal government’s portion of institutional support costs. 

Allocating Costs to Multiple Sponsored Awards 

When a cost benefits multiple sponsored projects, it must be allocated proportionally to the benefit each project receives, 2 CFR §200.405. 

  • Costs benefiting only one project must be charged entirely to that project. 
  • Costs benefiting multiple projects must be allocated across those projects. 

Allocation methods must be: 

  • Reasonable, 
  • Documented at the time the cost is incurred, and 
  • Approved in advance by the PI(s). 

If allocation isn't possible at the time of purchase, the cost must be charged to a non-sponsored account and then transferred later, following cost transfer guidelines. 

Allocation Methodologies 

Proportional Benefit Rule 

When benefit proportions can be readily determined, costs must be allocated accordingly. 

Example: If one award requires 150 mice and another requires 50, then the total cost of 200 mice should be split: 75% to the first award and 25% to the second. 

The individual processing the allocation must have first-hand knowledge of the benefit or documented allocation instructions. 

Interrelationship Rule 

When benefit proportions are difficult to determine due to the interconnected nature of the work, costs may be allocated using a reasonable method related to the expense. 

Acceptable methods include: 

  • Effort distribution 
  • FTE counts 
  • Number of experiments 
  • Hours of equipment use 
  • Sampling of actual usage 
  • Square footage 

Methodology documentation must be kept. 

Costs might not be allocated based on: 

  • Available funds 
  • Budget convenience 
  • Award restrictions 
  • Rotating or offset charging practices 

Allocation methodologies should be periodically reviewed and updated by the PI and DRA as circumstances change. 

Direct Charging of Costs Normally Treated as F&A 

Federal and Federal Flow-Through Awards 

Costs typically categorized as F&A (such as office supplies, postage, phones, memberships, and administrative salaries) are rarely direct costs. 

However, 2 CFR §200.413(c) permits direct charging only if all of the following conditions are satisfied: 

  1. Specifically identifiable: the cost can be clearly linked to a single project. 
  2. Approved in the Budget or in Writing: The cost is clearly included in the proposal budget or has been previously authorized in writing by the sponsor. 
  3. Not Recovered as F&A. The cost is also not reimbursed through the F&A rate. 
  4. Administrative and Clerical Salaries (if applicable) Administrative salaries may be charged directly only when: 
    • The services are integral to the project, 
    • The individuals can be specifically identified, 
    • The costs are approved in the budget or by the sponsor, and 
    • The costs are not recovered as F&A. 

Adequate documentation of activities is necessary, 2 CFR §200.430. 

Non-Federal Awards 

Greater flexibility may exist for non-federal awards in unlike circumstances, including: 

  • Awards with capped F&A rates, and 
  • Awards from for-profit entities funded with non-federal dollars. 

In these cases, directly charging costs typically regarded as F&A may be permitted under the sponsor’s terms. 

Documentation Requirements 

In rare cases where F&A costs are charged directly, OSP may require justification documentation, such as a Cost Allowability Confirmation form. 

Examples of Allowable Direct Charges 
  • Office supplies/postage: Large mailings for research surveys 
  • Telephone services: Grant-required hotline or crisis line 
  • Memberships: Required access to a project-specific resource 

Emergency Purchases 

If it becomes necessary to purchase an item not covered by the sponsor-approved budget, it must first be bought with non-restricted funds. 

The department should work with the designated post-award GCO to request sponsor approval when necessary. After approval is obtained and the budget is updated, the expense becomes allowable and can be transferred to the grant. 

Unallowable Costs and PI Responsibility 

The Principal Investigator (PI) is responsible for adhering to all financial terms and conditions of an award, including ensuring costs are correctly charged per the sponsor-approved budget and award terms. 

All expenses charged to a restricted account must: 

  • Approved by the PI prior to incurrence 
  • Be directly connected to the project. 
  • Be permissible under the award terms and conditions, and 
  • Be included in the sponsor-approved budget. 

Questions regarding cost allowability should be directed to the departmental GCO in the Office of Sponsored Programs (OSP) before incurring the expense. 

While departmental administrators may assist with account management, the PI is ultimately responsible for all costs charged to restricted accounts. PIs and their units are responsible for any overspending or unallowable costs. 

Resolution: Cost Transfers 

If any of the following happens: 

  1. An overbudget expenditure, 
  2. An unallowable cost, or 
  3. A charge posted after the grant end date, 

The GCO will notify the PI and DRA by email and request immediate resolution. 

If the issue remains unresolved, follow-up will occur during the next billing cycle. At that point, the post-award specialist will notify the PI and DRA, and copy the OSP Director and the PI’s chair or director. 

If the issue remains unresolved, OSP will transfer the expense(s) to the proper departmental SPABA account.