6-500 Allowability of Costs

6-510 General Principles

Funds derived from contracts and grants are University funds and are to be expended in accordance with contract and grant terms and conditions and University policies. When University policy and funding agency restrictions on expenditures differ, the more restrictive of the two policies shall prevail. Any questions on allowability of an expense should be directed to the campus Contracts and Grants Officer or other appropriate campus fiscal or administrative officer prior to incurring the expense.

6-520 Classification of Direct and Indirect Costs

Business and Finance Bulletin A-47, "University Direct Costing Procedures" outlines University policy regarding direct charging of all appropriate costs to a sponsored agreement when such costs are not reimbursed as indirect costs through application of approved indirect cost or facilities and administrative (F&A) rates. For federal awards, 2 CFR 220 (OMB Circular A-21), Sections D. and E., incorporate the following principles for determining direct and indirect costs:

Identification with 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 . . .

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 . . .

For specific information on direct cost elements, see Chapter 7. For specific information on indirect costs, see Chapter 8.

6-530 Federal Cost Principles

It is the University's policy to follow the federal cost principles for federal awards as set forth in 2 CFR 220 (OMB Circular No. A-21, "Cost Principles for Educational Institutions.") (See 6-F01.) Proper costs under federal awards must be reasonable, allocable, consistent, and allowable. OMB Circular A-21 provides the general federal framework for determining costs

applicable to grants, contracts, and other agreements with educational institutions. Section C. 2, "Factors Affecting Allowability of Costs," states:

The tests of allowability of costs under these principles are: they must be reasonable; they must be allocable to sponsored agreements under the principles and methods provided herein; they must be given consistent treatment through application of those generally accepted accounting principles appropriate to the circumstances; and they must conform to any limitations or exclusions set forth in these principles or in the sponsored agreement as to types or amounts of cost items.

6-531 Reasonable Costs
In the expenditure of extramural funds, the University follows the federal OMB Circular A-21 definition of reasonable costs as "the action that a prudent person would have taken under the circumstances prevailing at the time the decision to incur the cost was made" (the "prudent person" test.)

6-532 Allocable Costs
In the expenditure of extramural funds, the University follows the federal OMB Circular A-21 definition of allocable costs: "A cost is allocable . . . if the goods or services involved are chargeable or assignable to such cost objective in accordance with relative benefits received or other equitable relationship," also referred to as "the benefits test."

6-533 Consistent Treatment of Costs
In the expenditure of extramural funds, the University follows the OMB Circular A-21 requirement that elements of cost ". . . . must be given consistent treatment through application of those generally accepted accounting principles appropriate to the circumstances."

6-534 Allowable Costs
In the expenditure of extramural funds, the University follows the OMB Circular A-21 test of "allowability" which is determined by the terms and conditions of the sponsored agreement, including the authorized budget, and applicable federal regulations. See 6-F01, subparagraph e, for a list of individual costs.