Allowable costs under federal grants: the 2 CFR 200 tests

Where the cost rules come from

The cost principles for most federal awards are in Subpart E of the Uniform Guidance, 2 CFR 200.400 through 200.476. They apply to recipients and to subrecipients. A statute, the agency's program rules or the award itself can narrow them, and a pass-through entity can add requirements to a subaward.

Start with the award or subaward terms and the awarding agency's or pass-through entity's current instructions. Those documents may impose program-specific or stricter requirements in addition to the Uniform Guidance. If the instructions appear to conflict, ask the awarding agency or pass-through entity for written clarification before acting.

Two other rules shape every charge. Your financial system must include written procedures for deciding whether a cost is allowable (2 CFR 200.302(b)(7)). The agency or pass-through entity decides allowability when it reviews a claim, a report or an audit finding.

The eight tests in 200.403

A cost must meet all of these to be charged to a federal award (2 CFR 200.403):

• It is necessary and reasonable for the award and allocable to it.
• It conforms to any limits or exclusions in the cost principles or the award.
• It is consistent with policies that apply equally to your federally funded and other work.
• It gets consistent treatment. A cost can't be charged as a direct cost if other costs for the same purpose in like circumstances were charged to the award as indirect costs.
• It follows generally accepted accounting principles (GAAP).
• It is not included as a cost, or used as cost share, on another federal program.
• It is adequately documented.
• It is incurred during the approved budget period. Administrative closeout costs are the exception: they may be incurred until final reports are due and must be paid before then.

Failing any one test is enough for a cost to be questioned. Reasonableness, allocability and documentation call for the most judgment, so the next sections take them in turn.

Reasonable

A cost is reasonable if it does not exceed what "a prudent person would incur under the circumstances prevailing when the decision was made" (2 CFR 200.404). The regulation lists the factors: whether the cost is ordinary and necessary for the organization or the award; sound business practice and arm's-length bargaining; market prices for comparable goods or services in the area; whether the people involved acted prudently; and whether the cost departs from your written policies.

The written-policy factor matters because a reviewer can check it. If your travel policy caps hotel rates, or your pay policy sets a salary range, a federal charge above that line is hard to defend. Write the policy before the award, apply it to all funding sources, and keep evidence of how you set the price.

Allocable, and shared costs

A cost is allocable to an award if it can be assigned to that award by the benefit the award receives (2 CFR 200.405(a)). It qualifies if it was incurred specifically for the award, if it benefits the award and other work and can be split by a reasonable method, or if it is necessary to the organization's overall operation and assignable in part to the award.

• Split shared costs by benefit. When a cost benefits two or more projects and the proportions can be measured without undue effort, it must be split by proportional benefit (200.405(d)). Document the method, such as square footage or hours, and use it every time.
• Don't move costs between awards to cover a shortfall. A cost allocable to one federal award may not be charged to another "to overcome fund deficiencies" or to avoid restrictions (200.405(c)).
• Charge the net cost. Discounts, rebates, refunds and other credits that relate to allowable costs must be credited to the award as a cost reduction or cash refund (2 CFR 200.406).

Direct and indirect costs

There is "no universal rule" for classifying a cost as direct or indirect, but each cost incurred for the same purpose in like circumstances must be treated the same way (2 CFR 200.412). Direct costs can be identified with a particular award relatively easily and accurately. Indirect costs serve a common purpose, such as executive salaries, accounting, personnel administration and facility operation, and benefit more than one activity (2 CFR 200.413; 200.414(b)).

Administrative and clerical salaries should normally be indirect. They may be charged directly only if the services are integral to the award, the people can be specifically identified with it, and the costs are not also recovered as indirect costs (200.413(c)). The risk to watch is double charging: a bookkeeper's time charged directly to the award while the same organization also charges an indirect rate that already covers accounting.

Negotiated rates and the de minimis rate

An organization recovers indirect costs in one of two ways. It can negotiate a rate with its cognizant agency for indirect costs. Federal agencies must accept a negotiated rate unless a statute or regulation requires otherwise or the awarding agency approves a deviation under its published policy (2 CFR 200.414(c)).

Without a current negotiated rate, it may elect the de minimis rate under 2 CFR 200.414(f):

• The rate is up to 15% of modified total direct costs (MTDC). The organization chooses the rate, up to that limit.
• It needs no documentation to justify it and may be used indefinitely.
• Once elected, it applies to all of the organization's federal awards until it chooses to negotiate a rate.
• Agencies and pass-through entities may not require a lower rate unless a statute or regulation requires it.
• Costs must still be charged consistently as direct or indirect, never both.

MTDC is not the same as total direct costs. Under 2 CFR 200.1 it includes salaries and wages, fringe benefits, materials and supplies, services, travel, and up to the first $50,000 of each subaward. It excludes equipment, capital expenditures, rental costs, participant support costs, tuition remission, scholarships and fellowships, patient care, and the part of each subaward above $50,000.

For a subrecipient, the pass-through entity must accept a federally negotiated rate. If no negotiated rate exists, the pass-through entity and subrecipient set the rate together: either a rate they negotiate or the de minimis rate (2 CFR 200.332(b)(4)).

Personnel costs and time records

Salaries and wages charged to a federal award "must be based on records that accurately reflect the work performed" (2 CFR 200.430(g)(1)). The records must be supported by internal controls, be part of the official records, reflect the employee's total compensated activity without exceeding 100%, and support how pay is split among awards and other activities.

• Budget estimates alone don't qualify. They may be used for interim charges only if the estimates are reasonable, significant changes in work are recorded promptly, and periodic after-the-fact reviews adjust the charges so the final amount is accurate (200.430(g)(1)(vii)).
• Nonexempt staff need daily hours. Records must also show the total hours worked each day, under the Fair Labor Standards Act regulations (200.430(g)(3)).
• Cost share needs the same support. Salaries counted as match must be documented the same way as salaries charged to the award (200.430(g)(4)).
• Officers and their families. For a nonprofit, pay to officers, directors, trustees or their immediate families must be reasonable for the services actually rendered (200.430(h)).

A vague timekeeping policy draws findings even when the payroll itself is supportable. In a September 2025 audit, the Justice Department's Inspector General found that a grantee's timekeeping policy said only that employees give a supervisor "complete and accurate documentation" of their timesheets, and recommended written procedures for tracking and approving time on grant work (DOJ OIG Report 25-092).

Cost items that cause problems

Subpart E has specific rules for dozens of cost items. The table below covers items that come up in ordinary nonprofit, school and local government operations. Some are unallowable; others need written approval before you incur them, and 2 CFR 200.407 lists the sections where prior approval decides allowability.

Costs for outside professional services require a fact-specific review of the governing cost principle, the approved budget, the award terms, and any required prior approval. Confirm the treatment with the awarding agency or pass-through entity before charging the cost to the award.

When a cost needs approval, the request goes through the same channel as a budget revision. The budget changes guide covers that process.

Documentation that holds up

"Adequately documented" is a test of its own (2 CFR 200.403(g)). Federal rules require records that identify the amount, source and spending of federal funds, "supported by source documentation" (2 CFR 200.302(b)(3)). For each charge, a reviewer should be able to find what was bought, why the award needed it, who approved it, what it cost after credits, proof that it was paid, and which budget line it was charged to. For personnel, that means time records that meet 200.430(g).

The agency or pass-through entity sets the list of documents it wants with a payment request or report. The federal grant compliance checklist shows where cost review fits with payments, procurement and reporting. For one program's version of these rules, see NSGP reimbursement claims.