Cost Allocation

Definition

Federal guidance says that costs must be allocable to a project. What does allocable mean? Allocation is the process of assigning a cost, or a group of costs, to one or more projects, and for a federal proposal allocation best practices are governed by the principles contained in the Uniform Guidance, 2 CFR §200.405:

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. This standard is met if the cost:

Is incurred specifically for the Federal award;

Benefits both the Federal award and other work of the non-Federal entity and can be distributed in proportions that may be approximated using reasonable methods; and

Is necessary to the overall operation of the non-Federal entity and is assignable in part to the Federal award.

Principal investigators (PIs) often have multiple concurrent funded projects. Costs must be charged to one or more projects in reasonable proportion to the benefit provided to each project. If an expense solely benefits one project, it should be charged entirely to that project. However, if a cost benefits two or more projects or activities, a split allocation is needed.

Proportional Benefit

From 2 CFR §200.405 subpart (d):

If a cost benefits two or more projects or activities in proportions that can be determined without undue effort or cost, the cost must be allocated to the projects based on the proportional benefit.

This is when it is possible to determine the exact benefit of the cost to each funding source, the cost is allocated according to the proportion of benefit provided.

Example: A lab purchases 12 gallons of solution. 3 gallons of solution are used on Award A and 9 gallons on Award B.
- 25% (3/12) is charged to Award A
- 75% (9/12) is charged to Award B

Interrelationship Benefit

From 2 CFR §200.405 subpart (d):

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.

This is when the proportion of activities of two or more projects is not easily determined and an allocation method is necessary.

Allocation Methods

Whichever method is used, your allocation should meet the following:

Provide a reasonable linkage between the cost(s) incurred and the benefit to each individual project or activity.
Are identified prior to the allocation of expenses to sponsored projects or activities.
When it is not possible to allocate costs to the benefiting sponsored projects at the time when the goods or services are purchased, costs must be recorded in a non-sponsored account instead of being charged to a sponsored project.
Are documented with sufficient detail that a person unfamiliar with grants management would understand.
Allow for the consistent treatment of costs that meet the criteria of the allocation methodology.
Are reviewed periodically and adjusted as needed, for example if a new funding source has been added or an award has ended.
The end dates of all Awards should be taken into consideration. The benefit received on each Award may be impacted if, for example, two Awards have significantly different end dates.

Allocation Examples

Examples of methodologies that can be used as a basis for allocating costs include:

Effort: The cost of lab supplies is allocated based upon the PI’s/lab personnel effort charged to each project.
FTE: The cost of renting space is allocated based upon the number of FTEs working on each project.
Number of experiments: The cost of supplies is allocated based upon the number of experiments performed on each project.
Number of hours: The cost of equipment is allocated based upon the number of hours logged on for each project.
Sampling: Cost of laboratory supplies is allocated based on actual usage records for a representative sample.
Number of patients served: The cost of tests is allocated based upon the number of patients served by each project.
Square footage: The cost of supplies for the two laboratories that are conducting similar research is allocated based upon the square footage of the two laboratories.

Unacceptable Practices

Costs may not be allocated based on: