Cost Principles and Unallowable Costs MIT Research Administration Services

For example, the company cannot claim costs that are considered “unallowable,” such as entertainment or excessive executive compensation, under the contract’s cost principles. Once allowability criteria have been met, the cost must be evaluated against the criterion of allocability. That is, the cost has been incurred solely to support or advance the work of a specific sponsored research award.

Stanford Policy

These tests also apply regardless of treatment as a direct cost Costs that can be identified specifically with a particular sponsored project, an instructional activity, or any other institutional activity, or that can be directly assigned to such activities relatively easily with a high degree of accuracy. Or an F&A cost Necessary costs incurred by a recipient 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. F&A (indirect) cost pools must be distributed to benefitted cost objectives on bases that will produce an equitable result in consideration of relative benefits derived.. The fact that a proposed cost is awarded as requested by an applicant does not indicate a determination of allowability. All costs incurred for the same purpose and in like circumstances must be treated uniformly either as direct costs Cost Principles And Allowable Expenses or as indirect (facilities and administrative or F&A) costs.

(1) Costs incurred by contractor personnel on official company business are allowable, subject to the limitations contained in this subsection. Costs for transportation may be based on mileage rates, actual costs incurred, or on a combination thereof, provided the method used results in a reasonable charge. Costs for lodging, meals, and incidental expenses may be based on per diem, actual expenses, or a combination thereof, provided the method used results in a reasonable charge. The concepts of allowability, allocability, and reasonableness of costs address directly the legitimacy of a cost charged against a specific sponsored research award. Determination of allowability, allocability, and reasonableness of a given expense is based on specific guidelines of the sponsor and according to federal cost principles. Once you determine a cost is allowable according to Stanford policy, you must determine whether it is allowable for reimbursement according to federal regulations.

Cost Principles

• For example, the company cannot claim costs that are considered “unallowable,” such as entertainment or excessive executive compensation, under the contract’s cost principles.
• A primary responsibility of Research Accounting Services is to insure that all costs charged to the sponsored research award are allowable and allocable.
• Questions as to whether a particular expense is reasonable or not may be referred to a cognizant Dean’s Office staff member.
• (b) The Head of the Contracting Activity is responsible for following the policy, principles and standards set forth in this subpart in establishing the compensation and reimbursement provisions of contracts and subcontracts and for submission of deviations for Headquarters consideration and approval.
• (ii) Conventional Home Office Expense allocation techniques that use bases such as total operating costs, labor dollars, hours etc., are not appropriate because they inherently assume significant contractor investment (in terms of its own resources, such as, labor, material, overhead, etc.).
• Cost principles are important because they establish a uniform and transparent approach to measuring, allocating, and reporting costs.

These principles help to define which costs can be claimed, such as labor, materials, or overhead, and under what conditions. A primary responsibility of Research Accounting Services is to insure that all costs charged to the sponsored research award are allowable and allocable. A determination of allowability and allocability for a given cost is based on the specific guidelines of the sponsoring agency and according to federal cost principles. Activities and transactions could be considered unallowable costs due to federal regulations, Institute policy, sponsor guidelines or terms and conditions of a sponsored project. Costs unallowable for federal reimbursement may be allowable on a non-federal project with the prior approval of the sponsor. (a)(6) In determining the reasonableness of compensation, the compensation of each individual contractor employee normally need not be subjected to review and approval.

(4) Because the contract’s fee provides some compensation for Home Office Expenses, the contractor’s request for additional compensation must always be for an amount less than the Home Office Expenses that are incurred for the benefit of the management and operating contract. (ii) Conventional Home Office Expense allocation techniques that use bases such as total operating costs, labor dollars, hours etc., are not appropriate because they inherently assume significant contractor investment (in terms of its own resources, such as, labor, material, overhead, etc.). The contracts are totally financed by DOE advance payments, and DOE provides government-owned facilities, property, and other needed resources. (b) The Head of the Contracting Activity is responsible for following the policy, principles and standards set forth in this subpart in establishing the compensation and reimbursement provisions of contracts and subcontracts and for submission of deviations for Headquarters consideration and approval.

Cost Principles and Allowable Expenses

For government contractors, it helps to ensure that they are reimbursed appropriately and in line with the terms of their contracts. Jane was feeling rather good after her presentation and decided to celebrate in a BIG way. She brings back receipts showing that the cost of her final dinner in Seattle, exclusive of the wine, was $147 per person. The cost principle of reasonableness stipulates that costs will be reimbursed only if a prudent person would have paid this amount. It is crucial to code and categorize expenses correctly to comply with Stanford’s obligation to the federal government for both direct and indirect cost recovery.

3102-506 Compensation for personal services.

The cost principles The government-wide principles, issued by OMB (or, in the case of commercial organizations, the Federal Acquisition Regulation 48 CFR 21, or, in the case of hospitals, 45 CFR 75, Appendix IX, “Principles For Determining Costs Applicable to Research and Development Under Grants and Contracts with Hospitals”), on allowability and unallowability of costs under federally sponsored agreements. Establish standards for the allowability of costs, provide detailed guidance on the cost accounting treatment of costs as direct or F&A costs Necessary costs incurred by a recipient 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. To facilitate equitable distribution of indirect expenses to the cost objectives served, it may be necessary to establish a number of pools of F&A (indirect) costs. F&A (indirect) cost pools must be distributed to benefitted cost objectives on bases that will produce an equitable result in consideration of relative benefits derived., and set forth allowability and allocability principles for selected items of cost. Depends on the type of organization (regardless whether domestic or foreign) making the expenditure.

3102-0531 Patent costs and technology transfer costs.

• F&A (indirect) cost pools must be distributed to benefitted cost objectives on bases that will produce an equitable result in consideration of relative benefits derived..
• The federal government asserts that federal funds may not be used to pay unallowable expenses.
• Individuals directly involved with a project, particularly the PI, determine whether a cost is allocable to that project.
• The process may entail assigning a cost(s) directly to a final cost objective or through one or more intermediate cost objectives.
• Generally, the compensation paid individual employees should be left to the judgment of contractors subject to the limitations of DOE-approved compensation policies, programs, classification systems, and schedules, and amounts of money authorized for wage and salary increases for groups of employees.

Costs are defined as allowable or unallowable for reimbursement by the government in the Uniform Guidance. The federal government asserts that federal funds may not be used to pay unallowable expenses. Unallowable expenses may NOT be charged either directly or indirectly to the federal government. In the context of government contracting, for example, cost principles outline which costs are allowable or unallowable for reimbursement under government contracts.

Allocable

Each financial transaction charged against a sponsored research award is evaluated against the three concepts of allowability, allocability, and reasonableness. (1) “Cost of travel by contractor-owned, -leased, or -chartered aircraft,” as used in this paragraph, includes the cost of lease, charter, operation (including personnel), maintenance, depreciation, insurance, and other related costs. (i) One of the conditions warranting approval of the actual expense method, as set forth in the regulations referred to in paragraphs (a)(2)(i), (ii), or (iii) of this subsection, must exist. In another example, a manufacturing business uses cost principles to allocate its costs between products. The company follows standard costing procedures, assigning costs such as raw materials, labor, and factory overhead to the products they manufacture. This allows the company to accurately assess the cost of each product and make informed pricing decisions.

What are cost principles?

Jane  is  not eligible for full reimbursement of this expense from Stanford either, although she can be reimbursed for a lesser, reasonable amount.

Since certain costs, such as office supplies and administrative salaries are normally treated as F&A costs, these costs cannot be charged directly to federal awards unless the circumstances of an award are clearly different from the normal operations of the unit. This principle exists to ensure that each educational institution’s practices used in estimating costs for a proposal are consistent with cost accounting practices used by the institution in accumulating and reporting costs. According to Stanford policy and federal regulations, an expense qualifies as a direct cost for a sponsored project when it meets all four cost principles. These principles govern costs that may be charged to federally sponsored projects either directly or indirectly.