Cost Principles

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Federal Cost Principles

Federal grants and contract awards must adhere to administrative guidelines presented in the 'Uniform Guidance'. In this context, the guidelines for spending award money are called 'Cost Principles'.

On top of the Uniform Guidance, most contracts (but not grants) are subject to additional administrative stipulations in the Federal Acquisition Regulation (FAR), which applies primarily to procurement.

It is therefore, the responsibility of the university to adhere to both the Uniform Guidance Cost Principles and FAR whether they are the primary or sub-recipient of federal funding.

What are Direct Costs?

Direct costs are expenses specifically incurred to achieve a contract's or a grant's objective.

In the words of the Uniform Guidance, 

"Direct costs are those costs that can be identified specifically with a particular final cost objective, such as a Federal award, or other internally or externally funded activity, or that can be directly assigned to such activities relatively easily with a high degree of accuracy" 

What are Indirect Costs?

Indirect costs are expenses incurred by the institution on behalf of more than one specific project.

According to the Federal Office of Management and Budget (OMB), indirect costs are 

"incurred for a common or joint purpose benefitting more than one cost objective, and not readily assignable to the cost objectives specifically benefitted, without effort disproportionate to the results achieved"

The Federal Cost Principles introduce a further concept here

What is the Modified Total Direct Cost?

Certain direct cost items do not significantly benefit from indirect cost activities and services. These items are therefore excluded from direct costs in some federal cost accounting procedures. The impact of these exclusions is that they 'modify' the total direct cost thus creating the MTDC total. In this context, the main exclusions are;

• Tuition Remission

• Student financial aid, including scholarships and fellowships

  • Note that this applies when students are considered to be participants and compensated via a non-payroll route. In any instance where a student is receiving compensation via payroll this cost is not excluded.

• Patient care

• Subcontracts in excess of $25,000

• Equipment items costing more than $5,000 (capital equipment)

• Capital expenditures

Allowability of Costs

All costs, direct, or indirect that are charged against a government-sponsored contract or grant must be allowable under federal guidelines. That is to say that they must be allowable according to the Uniform Guidance. Any costs that are not allowable cannot be paid for using federal funds.

Allowable (§ 200.403) (FAR 31.201-2)

The uniform guidance has an extensive list of what is specifically unallowable. The following items of cost are NOT allowable according to Section J of OMB Circular A-21. 

• Advertising

• Public Relations

• Alcoholic Beverages

• Alumni Activities

• Bad Debts

• Certain Legal Costs

• Charitable Contributions

• Contingencies

• Donations

• Entertainment

• Fines and Penalties

• First Class Air Travel

• Fund Raising

• Investment Management

• Goods and Services for Personal Use

• Housing of Officers

• Interest Expense for Operating Purposes

• Lobbying Costs

• Losses on Sponsored Research Agreements

• Memberships in Civil, Community and Social Organizations

• Selling and Marketing Costs

• Telephone Line Costs

Other items of cost may not be allowable depending on the circumstances.  Any of the above that are found at audit to be charged to a grant will need to be paid back to the funding agency. If the offending item cannot be returned for refund from a vendor, then the cost will need to be met from an alternate fund. Responsibility here would begin with the Lead PI. If the Lead PI does not have available funds then the matter would need to be escalated via via department and then division hierarchies until available money is found.

In addition to a cost not of being on the specific list on unallowable costs, there are further criteria that determine its allowability under Uniform Guidance. These factors are allocability, reasonableness, and consistency.

Reasonable (§ 200.404) (FAR 31.201-3)

The question of whether a cost is reasonable largely follows from whether it is allocable

For example, the cost of a piece of equipment to sequence DNA could not be reasonably be applied to a research project whose scope is specific to the development of data models for viral epidemiology based on genomic datasets. While Genomic data derived from DNA sequencing equipment is a part of viral epidemiology, the award scope is to develop data models and not to collect or sequence data. Using the funds in such a way (without funder approval) is not reasonable as it is a significant change in the scope of the project. 

However, one can imagine a more nuanced situation whereby a cost might be allocable but also not reasonable. 

An example of such a thing would be when a cost is of a type that has been identifiably allocable (associated with the project) but the pricing of the good or service is excessively variant from expected. For example, if the rate for a particular service is $20,000, it would be unreasonable to pay $50,000. Rice has procurement policies to assist with avoiding unreasonable purchases. Additionally, quotes for equipment items should be included with a budget justification in a proposal. These values become the guideline for 'reasonable' once the proposal is awarded. 

"A cost may be considered reasonable if the nature of the goods or services acquired or applied and the associated dollar amount reflect the action that a prudent person would have taken under the circumstances prevailing when the decision to incur the cost was made"

Allocable (§ 200.405) (FAR 31-201-4)

To be allowable, a cost must also be allocable. Allocable means that the cost was incurred solely to support or advance the work of a specific sponsored research award.

"a cost is allocable to a particular Federal award or other cost objective if the goods or services involved are chargeable or assignable to that Federal award or cost objective in accordance with relative benefits received"

To meet the test of allocability, costs must be identified specifically to a sponsored project with a high degree of accuracy.

Consistent

The uniform guidance states that, 

"it is essential that each item of cost incurred for the same purpose be treated consistently in like circumstances either as a direct or an indirect (F&A) cost in order to avoid possible double-charging of Federal awards" 

Additional Resources

1. Office of Management and Budget, "Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, § 200.400 Policy guide. https://www.ecfr.gov/current/title-2/subtitle-A/chapter-II/part-200/subpart-E  

2. Federal Aquisition Regulations. Accounting Standards for Educational Institutions. https://www.acquisition.gov/far/part-30 

3. Direct Costs. 2 CFR 200.413 https://www.ecfr.gov/current/title-2/section-200.413 

4. Indirect Costs 2 CFR 200.56 (Feb. 21, 2021) https://www.ecfr.gov/on/2021-02-21/title-2/subtitle-A/chapter-II/part-200/subpart-A/subject-group-ECFR2a6a0087862fd2c/section-200.56 replaced in 2022 by 2 CFR 200.414 https://www.ecfr.gov/current/title-2/section-200.414 

5. Collection of unallowable costs. 2 CFR 200.410 https://www.ecfr.gov/current/title-2/section-200.410 

6. Accounting for Unallowable Costs. FAR 31.201-6 https://www.acquisition.gov/far/31.201-6#FAR_31_201_6__d1950e10