Research Administration Policies
RA10 Costing Principles for Sponsored Awards
Policy Steward:Vice President for Research and Corporate Controller >
- Federal Policy
- Allowable, Allocable and Reasonable
- Direct Vs. Indirect (F&A) Costs
- Further Information
- Cross References
All funds must be spent in accordance with Penn State policy, applicable state and federal law, and sponsor terms and conditions. Only allowable, allocable, and reasonable costs may be charged directly to sponsored agreements.
Following is an overview of basic costing principles. All those involved in the administration of sponsored agreements should be familiar with these concepts.
As a condition of receiving federal grants and contracts, Penn State agrees to follow federal policies, including 2 CFR Part 200 - UNIFORM ADMINISTRATIVE REQUIREMENTS, COST PRINCIPLES, AND AUDIT REQUIREMENTS FOR FEDERAL AWARDS, also referred to as the Uniform Guidance. The Uniform Guidance, specifically Subpart E – Cost Principles, provides detailed requirements regarding costs on sponsored awards as well as definitions of direct, indirect, allowable and unallowable costs. In addition, the Uniform Guidance requires that Universities comply with certain regulations, including Title 48: Federal Acquisition Regulations System, Part 9905 - Cost Accounting Standards (CAS) for Educational Institutions:
- CAS 9905.501 – Consistency in Estimating, Accumulating and Reporting Costs
- PIs and administrative support staff must ensure compliance by maintaining consistency in the manner in which proposal budgets are prepared and how the funds are budgeted and expenses accounted for during the life cycle of the award.
- CAS 9905.502 – Consistency in Allocating Costs Incurred for the Same Purpose
- Penn State complies by ensuring costs incurred for the same purpose, in similar circumstances, are treated consistently in our accounting system.
- CAS 9905.505 –Accounting for Unallowable Costs
- PIs and administrative support staff must ensure that costs defined as "unallowable" are not directly charged to Federal projects.
- CAS 9905.506 – Cost Accounting Period
- Penn State must comply with several rules governing how costs are treated for the purposes of calculating and negotiating our F&A rate.
Allowable costs are specifically related to the sponsored agreement, benefit the sponsored agreement in the proportion to the amount charged, and conform to the policies and procedures of Penn State. The costs must be necessary for the performance of the project. A particular cost may be allowable on one project, where it is specifically needed for performance, but unallowable on another project where no similar performance requirement exists.
Detailed factors affecting the allowability of costs are outlined in Uniform Guidance 2 CFR 200.403. These factors include:
- Costs must be necessary and reasonable
- Costs must be given consistent treatment
- Costs must conform to any limitations or exclusions set forth in the sponsored agreement or in the Federal Cost Principles (See Uniform Guidance 2 CFR 200.420 Considerations for selected items of cost)
- More detail is available in FNG05 – Expenditure Guidelines for Costs Not Allowable under OMB
- More detail is available in FNG05 – Expenditure Guidelines for Costs Not Allowable under OMB
- Costs cannot be included as a cost or used to meet cost sharing or matching requirements for any other federally-financed program.
- Cost must be adequately documented.
It is the purpose of the charge, not necessarily the type of charge that determines its allowability.
Allocable costs are those that provide direct benefits to the project and can be specifically identified to that project with a high degree of accuracy.
The detailed criteria to meet the allocability standard are available in the Uniform Guidance - §200.405 Allocable costs. A cost is allocable to a sponsored agreement if:
- Is incurred solely to advance the work funded under the sponsored project;
- Benefits both the sponsored project and other work of Penn State in proportions that can be clearly documented
through reasonable methods.
A cost may also be allocable to multiple projects. It is important that the costs be allocated appropriately across all projects which benefit. It is not appropriate to charge all of the cost of an item to one sponsored award if it benefits more than one award– each cost needs to be allocated based on how it benefits the various projects. Per Uniform Guidance 2 CFR 200.405-(d)
Direct cost allocation principles. "If a cost benefits two or more projects or activities in proportions that can be determined without undue effort or cost, the cost should be allocated to the projects based on the proportional benefit. If a cost benefits two or more projects or activities in proportions that cannot be determined because of the interrelationship of the work involved, then ... the costs may be allocated or transferred to benefitted projects on any reasonable documented basis. Where the purchase of equipment or other capital asset is specifically authorized under a Federal award, the costs are assignable to the Federal award regardless of the use that may be made of the equipment or other capital asset involved when no longer needed for the purpose for which it was originally required."
Some costs may only partially benefit a sponsored award – in such cases, the costs should be allocated to the sponsored award based only on the percentage of benefit derived from that cost item, with the balance of the cost charged to an appropriate non-sponsored account.
The Uniform Guidance also discusses transfers of costs under the allocability standard:
Uniform Guidance 2 CFR 200.405-(c) - Any cost allocable to a particular Federal award under the principles provided for in this part may not be charged to other Federal awards to overcome fund deficiencies, to avoid restrictions imposed by Federal statutes, regulations, or terms and conditions of the Federal awards, or for other reasons. However, this prohibition would not preclude the non-Federal entity from shifting costs that are allowable under two or more Federal awards in accordance with existing Federal statutes, regulations, or the terms and conditions of the Federal awards.
In other words, costs which are truly allocable to an award may be transferred or shifted if allowable under the award to which it is being transferred, but cost overruns may not be transferred to another federal award.
Reasonable costs reflect the actions a prudent person would take at the time the decision was made to incur the costs. Reasonable costs are those that are generally recognized as necessary for the success of the sponsored agreement and are consistent with the sponsor requirements and Penn State policy.
The detailed considerations to determine reasonableness of a given cost are available in the Uniform Guidance 2 CFR 200.404 - Reasonable costs. A cost is considered reasonable if:
- It is generally recognized as ordinary and necessary for the performance of the sponsored project;
- It does not exceed that which would be incurred by a prudent person in the conduct of business; in other words, would this cost be reasonable if being paid personally? Does it compare to market prices for comparable goods and services?
- It meets the requirements imposed by Federal and State regulations, terms and conditions of a sponsored agreement, or agency guidelines;
- The individuals acted with prudence in considering their responsibilities to Penn State, its employees, its students, State or Federal Government, and the public at large; and
- The actions taken to incur the cost are consistent with established institutional policies and practices applicable to the work of the institution generally and inclusive of sponsored projects.
When incurring costs against sponsored awards the PI, with assistance from the administering staff, must ensure only allowable, allocable, and reasonable costs are charged to sponsored agreements. To determine whether a particular cost is allowable, allocable and reasonable, apply the "prudent person" test. If the answer to any of the following questions is "no," then the costs should not be charged to a sponsored award:
- Is the cost necessary for the performance and/or successful completion of the technical scope of the project?
- Is the cost to be charged reasonable?
- Could you comfortably explain to someone outside the University why this item was charged to your project?
- Is charging this expense consistent with PSU policies?
The primary question to ask in making a determination as to whether a particular cost is allowable, allocable and reasonable is: Does the cost benefit the project?
Several documents are available which in most circumstances will provide a measure of confidence as to whether a certain expense is allowable, allocable, and reasonable.
- The agency-approved budget for the project. The allowability of a cost is first determined by examining the budget that the agency approved for the project. Does the proposed expense show up under a line item of the budget? If the item does not appear in the budget, then other reviews must be conducted to determine if the item is allowable under rebudgeting authority that may be granted in the situation, or if the item may be allowable if prior approval is obtained in writing from the agency. If the budget has not been incorporated into the award document, then allowability must be determined in accordance with allowable cost principles of the agreement (Uniform Guidance 2 CFR 200 Subpart E – Cost Principles), plus agency deviations).
NOTE: Any approval from an agency regarding costs must be coordinated through the appropriate Research Administrator for the sponsor. Technical contacts do not have the authority to make decisions regarding the allowability of costs. The Sponsor's Research Administrator can ensure that the appropriate administrative authority of the sponsor is contacted and that written approval is received before determination is made that a cost is allowable, allocable and reasonable.
- The award document issued by the sponsor. Allowability of certain costs may be addressed within the award document or the contract/agreement issued for the sponsored project. For example, grant awards may identify certain costs that are specifically unallowed by the agency based upon recommendations from the peer review system.
- Agency Guidelines on award administration. Even if the type of expense proposed appears on the budget, the specific expense may not be allowable. Most Federal agencies have guidelines for administering grants. These guidelines give direction on the allowability of certain costs. For example, travel costs may appear in the budget, but the specific cost for airfare to Europe for a meeting may require prior approval according to the guidelines of the specific sponsoring agency.
- Uniform Guidance. The OMB Uniform Guidance Subpart E – Cost Principles details types of costs which are and are not allowable and must be followed for all federal awards.
Direct costs are those expenses that are essential to the conduct of sponsored institutional activities and which can be readily attributed and directly charged to specific individual projects. They include expenditures for such items as personnel (salaries and fringe benefits), supplies, equipment, travel and other direct costs necessary for conducting the sponsored activity. See Uniform Guidance 2 CFR 200.413 Direct Costs.
Indirect Costs - Facilities & Administrative Costs (F&A)
Facilities and administrative (F&A) costs (also referred to as indirect costs or overhead) are those expenses that are essential to the conduct of sponsored institutional activities but which cannot be readily attributed and directly charged to specific individual projects. (See Uniform Guidance 2 CFR 200.56, 2 CFR 200.414, and RA30 for further definition and guidance.)
Determination of Direct vs.F&A
Determining if a cost should be included as a direct cost must be done at the proposal stage. There are certain departmental costs which are included as F&A, and therefore, should not be included as a direct cost. PIs should work closely with the Research Administrator to ensure that costs normally considered F&A are not included as direct costs in a proposal, unless there is a compelling reason to do so. See RA21 for additional guidance.
For questions, additional detail, or to request changes to this policy, please contact the Office of the Vice President for Research, or the Office of the Corporate Controller.
RA21 – Development of Proposal Budget
RA30 – Facilities and Administrative Costs
Effective Date: February 26, 2016
Date Approved: February 22, 2016
Date Published: February 26, 2016
Most recent changes:
- February 26, 2016- This new policy (incorporating old RA01) has been created as part of the policy reorganization brought about by the implementation of the Uniform Guidance (2 CFR 200).
Revision History (and effective dates):
- June 26, 2012 - Editorial change to last paragraph in "Approval Process for Establishing an Industry Membership Program" section, adding an "additional information" statement regarding Membership Programs.
- December 21, 2010 - Editorial change to #1 in "All Industry Membership Programs Shall Abide by the following Guidelines" section. Clarification of the 15% unrestricted grant facilities and administrative rate charge (applied to the total award amount).
- December 3, 2010 - Incorporation of Industry Membership Programs – guidelines and principles.
- January 1, 2010 - Editorial changes. Title changed FROM "Senior Vice President for Research and Dean of the Graduate School" TO "Vice President for Research and Dean of the Graduate School," to reflect position changes, effective January 1, 2010.
- September 2, 2008 - Clarified the approval process.
- July 10, 2007 - New Guideline.