Cost Principles for Grants

Federal grant cost principles are the rules established primarily in 2 CFR Part 200 Subpart E that determine which costs a grantee may charge to a federal award and how those costs must be documented, covering both direct project costs and indirect (overhead) costs.

What are Cost Principles for Grants?

The cost principles in 2 CFR Part 200 Subpart E apply a three-part test to every cost charged to a federal grant: the cost must be allowable (not specifically prohibited by Subpart E or the award terms), allocable (directly benefiting or fairly attributed to the project), and reasonable (consistent with what a prudent person would pay for the same item under similar circumstances).

Allowable direct costs include: salaries and wages of personnel working on the project (subject to effort reporting requirements), fringe benefits, supplies and materials consumed for the project, equipment (subject to specific thresholds and approval requirements), travel directly related to the project, and other direct costs authorized in the approved budget.

Certain costs are categorically unallowable regardless of the project: alcoholic beverages, entertainment, fines and penalties, fund-raising costs, lobbying costs, costs of organized fund drives, and costs related to legal proceedings against the federal government. Other costs, such as entertainment with a programmatic purpose or advertising, require specific agency prior approval.

Indirect costs (overhead, G&A, fringe) may be recovered through a negotiated indirect cost rate agreement with the cognizant federal agency, or through the de minimis indirect cost rate of 10% of modified total direct costs (MTDC) available to organizations that have never had a negotiated rate.

Why Grant Cost Principles matter for government contractors

For SBIR awardees and other small businesses receiving grants, understanding cost principles is essential for: correctly structuring the budget proposal, avoiding charging unallowable costs that could trigger repayment demands, and maximizing legitimate cost recovery through properly documented indirect rates.

Example

An SBIR Phase II grantee charges $12,000 in conference and entertainment expenses to the grant, claiming the costs supported project dissemination. A Single Audit finds that entertainment costs are unallowable under 2 CFR Part 200.438 regardless of purpose, and that the portion of conference costs attributable to entertainment (meals and receptions) is also unallowable. The auditor issues a finding and the grantee repays $4,800 in disallowed entertainment-related costs.

Frequently Asked Questions

What is the difference between a direct cost and an indirect cost in a federal grant?

A direct cost is one that can be specifically identified with the grant project, a researcher's salary, project-specific supplies, or travel directly related to project work. An indirect cost benefits multiple projects and cannot be practically allocated to a single award, examples include building rent, utilities, accounting, and IT support. Both may be charged to a grant if properly documented and within approved rates.

What is modified total direct costs (MTDC)?

MTDC is the base used to calculate indirect cost recovery under many rate agreements. It includes salaries, wages, fringe benefits, materials, supplies, services, travel, and the first $25,000 of each subaward. It excludes equipment, capital expenditures, patient care costs, tuition remission, and subaward costs above $25,000 per subaward.

What if a grantee does not have a negotiated indirect cost rate?

Organizations without a negotiated rate may use the de minimis rate of 10% of MTDC under 2 CFR Part 200.414(f), provided they have never had a federally negotiated indirect cost rate and are not required to have one. Once an organization negotiates a rate, it may not revert to the de minimis rate.

Are salary costs always allowable on federal grants?

Salaries are generally allowable but subject to key rules: costs must be based on documented effort (time and effort reporting), compensation must be consistent with the organization's established pay policies, and compensation above the executive pay cap (applicable to NIH and certain other programs) is unallowable above the specified threshold.