Compliance Requirements - Allowable Costs/Cost Principles (B)

Allowable Costs/Cost Principles (B)

This compliance requirements is considered one of the most, if not the most, important sections because it covers the cost accounting policies, expenses and expenditures, and actual use of Federal funds associated with the administration of a Federal assistance program. In other words, it provides the basis and principles for which recipients must adhere to when expending the assistance they have received.

Due to the different types of recipients, the Federal government has categorized them into three groups: State, local, and Indian tribal governments; institutions of higher education; and non-profit organizations. Each recipient is categorized into one of the mentioned groups, and each group has a separate set of cost principles to follow. The cost principles applicable to a type of recipient apply to all Federal assistance received by that entity, regardless of whether the awards are received directly from the Federal government or indirectly through a pass-through entity.

The OMB has issued a Cost Principle Circular for each of the categories mentioned above, which serves as a guide for expending Federal assistance in accordance with laws and regulations:

• OMB Circular A 87, “Cost Principles for State, Local, and Indian Tribal Governments” (2 CFR part 225) – This circular includes the 50 States of the United States and the District of Columbia (Washington, D.C.), or any agency or instrumentality of these governments, as well as any county, parish, municipality, city, town, State-designated Indian tribal government, school district, United States territories and possessions, and any agency or instrumentality of these governments.

• OMB Circular A-21, “Cost Principles for Educational Institutions” (2 CFR part 220) - All institutions of higher education (e.g., Colleges, Universities, etc.) are subject to the cost principles contained in this circular.

• OMB Circular A-122, “Cost Principles for Non-Profit Organizations” (2 CFR part 230) - Non-profit organizations are subject to this circular, except those non-profit organizations listed in OMB Circular A-122, Attachment C that are subject to the commercial cost principles contained in the Federal Acquisition Regulation (FAR).

The three circulars list various types of cost or expense item (such as travel expense, maintenance expense, payroll salaries, lobbying costs, purchase of materials, payment of utility bills, etc.), and establishes whether each is either allowable or unallowable. Allowable costs are those which the Federal government has determined permissible for using Federal assistance, while unallowable costs are those for which the government prohibits incurring when using Federal assistance. Certain cost items are considered universally unallowable, such as cost related to illegal activities and lobbying costs, but others may be considered unallowable for a type of recipient while being allowable for another type of recipient. As a general rule, any assistance used inappropriately, such as incurring unallowable costs, requires reimbursement to the Federal government.