Allowable Costs Under the Uniform Guidance: A Test for Any Charge

The short version

• Allowable costs under the Uniform Guidance must pass every factor in 2 CFR 200.403, including being necessary, reasonable, allocable, consistently treated, and adequately documented. Failing one factor is enough.
• "Reasonable" means what a prudent person would pay in the circumstances at the time (200.404). "Allocable" means assignable to the award in proportion to the benefit it received (200.405).
• Salary charges must rest on records of work actually performed. Budget estimates alone do not qualify (200.430(g)).
• Some items are flatly unallowable, alcohol among them (200.423). Others, such as entertainment, fundraising, and interest, are unallowable with narrow exceptions.
• In a Single Audit, known questioned costs become a reported finding when known or likely questioned costs exceed $25,000 for a type of compliance requirement on a major program (200.516(a)(3)). Undocumented amounts count as if confirmed noncompliant (200.1).

When the cost principles apply

The 2024 revision of 2 CFR Part 200 took effect October 1, 2024, per the Federal Register notice, and agencies could choose to apply it to earlier awards but did not have to. A nonprofit holding older and newer awards may be working under two versions at once. Read the award terms before you read the regulation.

Under 200.401(a), Subpart E does not apply to fixed amount awards (with an exception in 200.101(b)), capitation awards, or other awards where actual costs need not be accounted for. For a cost reimbursement grant, assume the principles apply.

Allowable costs under the Uniform Guidance: an eight-question test

2 CFR 200.403 lists the factors. Here they are as questions, in the order we would ask them at the general ledger.

1. Was it necessary for this award, and would a prudent buyer have paid this much? (200.403(a), 200.404)
2. Did the award benefit, and in what share? (200.403(a), 200.405)
3. Does any cost principle or award term limit or exclude it? (200.403(b))
4. Would the organization's written policy treat it the same way if a private foundation were paying? (200.403(c))
5. Is the same kind of cost always direct, or always indirect? (200.403(d))
6. Is it recorded under GAAP? (200.403(e))
7. Has it already been charged, or counted as cost share, on another federal award? (200.403(f))
8. Is there paper that proves 1 through 7, and was the cost incurred in the budget period? (200.403(g) and (h))

The question people skip is number 4. A cost fails if the organization only buys it, or only pays that rate, when federal money is paying. Consistency with the organization's own written policy is a test in 200.403(c), 200.404(e), and again for compensation in 200.430(a)(1).

Number 5 is the other quiet failure. 200.403(d) says a cost may not be charged directly to an award if costs for the same purpose in like circumstances went to the award through the indirect rate. The classic case is a slice of the executive director's salary charged directly to the grant while the rest sits in the indirect pool with no time records behind the split.

Reasonable and allocable, in plain terms

A cost is reasonable if it does not exceed what a prudent person would incur under the circumstances when the decision was made (200.404). The regulation points to local market prices, arm's-length bargaining, and departures from the organization's written policies. The test looks at the moment of purchase, so the file should too: quotes, or a note on why the pricier option won.

A cost is allocable if it is assignable to the award in line with the benefit received (200.405(a)). It qualifies if it was incurred specifically for the award, benefits the award and other work in proportions that can be approximated reasonably, or is needed for overall operations and assignable in part. Two rules catch people:

• A cost allocable to one federal award may not be moved to another to cover a deficit or dodge a restriction (200.405(c)).
• If a shared cost's proportions can be determined without undue effort, it must be split by proportional benefit (200.405(d)).

Time and effort documentation under 200.430(g)

Payroll is usually the largest line on a nonprofit's federal award, so this is where allowable cost problems get expensive. Under 2 CFR 200.430(g)(1), salary charges must be based on records that accurately reflect the work performed. Those records must be backed by internal control, sit in the official records, reflect the employee's total compensated activity up to 100 percent, and support the split when someone works on more than one award or on federal and non-federal work.

Budget estimates alone do not qualify as support. They may be used for interim accounting only if the estimates produce reasonable approximations, significant changes in work are entered promptly, and periodic after-the-fact reviews adjust the charges so the final amount is accurate (200.430(g)(1)(vii)). For nonexempt employees, records must also show total hours worked each day (200.430(g)(3)). Staff time counted as cost share needs the same support (200.430(g)(4)).

Our interpretation: the regulation does not prescribe a timesheet format. What fails audits is a payroll allocation set from the budget in July and never looked at again.

Unallowable costs that trip nonprofits up

The selected items in 200.420 to 200.476 are not a complete list. Under 200.420(b), leaving an item out does not make it allowable or unallowable, and the 200.403 factors still apply. Where an award term conflicts with a selected item, the award governs.

Fundraising and investment activities, allowable or not, must still be allocated their share of indirect costs (200.442(d)). Our guide to nonprofit indirect cost rates covers the mechanics. And conference meals and refreshments can be allowable under 200.432 when the event's primary purpose is disseminating technical information beyond the organization. The wine is still not.

Worked examples

These are hypothetical, built to show how the test runs.

Example 1: the advisory meeting dinner. A nonprofit hosts its federally funded program's community advisory group for a working session and dinner. The bill is $2,400, of which $300 is wine. The $300 is unallowable under 200.423, full stop. The other $2,100 depends on what the event was. A social thank-you is entertainment, unallowable under 200.438 unless the award includes it. An event that disseminated technical information beyond the organization can cover meals under 200.432. The agenda and attendee list decide it, so file them before anyone asks.

Example 2: the stale allocation. A program director's salary is charged 60 percent to a federal award from the budget. In month five, a new foundation grant pulls her time and she works about 40 percent on the federal program for the rest of the year. Nobody updates the allocation. Under 200.430(g)(1)(vii), the after-the-fact review had to catch this and adjust. If it did not, the excess charge is a likely questioned cost, and any portion without records behind it is calculated as noncompliant under the 200.1 definition.

Example 3: the line of credit. A nonprofit on reimbursement draws on a bank line to make payroll while waiting for federal funds, then charges the interest to the award. Interest on borrowed capital is unallowable under 200.449(a). The capital asset exception does not reach working capital.

Example 4: the job ad. A $650 posting to recruit a case manager funded by the award is allowable advertising under 200.421(b)(1). A $650 boosted post about the organization's anniversary is public relations outside 200.421(d) and is unallowable on the award.

How questioned costs appear in Single Audits

A questioned cost is an amount that, in the auditor's judgment, is noncompliant or suspected noncompliant, lacked adequate documentation at the time of the audit, or appeared unreasonable (2 CFR 200.1). Internal control deficiencies alone do not create one.

Under 200.516(a)(3), the auditor must report known questioned costs as a finding when known or likely questioned costs exceed $25,000 for a type of compliance requirement for a major program. For a program not audited as major, known questioned costs above $25,000 are reported if the auditor becomes aware of them (200.516(a)(4)). Each finding must identify the questioned costs by Assistance Listing and award number and explain how they were computed (200.516(b)(6)).

On the Federal Audit Clearinghouse, findings are tagged by compliance requirement, and "B. Allowable costs/cost principles" is its own code, with a separate yes or no flag for questioned costs. Our guide to reading Single Audit findings walks through the search.

Questioned is not the same as disallowed. A disallowed cost is one the agency or pass-through entity determines to be unallowable (200.1). Payments for costs so determined must be refunded with interest (200.410). Questioned costs are not improper payments until reviewed and confirmed (200.1).

What a finance firm can fix

Our interpretation: most allowable cost problems are paperwork that was never created, not bad intent. That is fixable work for an outsourced controller:

• A written cost policy that applies to all funding sources, with travel, meals, and memberships spelled out
• A chart of accounts that keeps alcohol, entertainment, fundraising, lobbying, and interest out of grant and indirect cost pools
• Quarterly after-the-fact reviews of payroll allocations, signed and adjusted
• A pre-charge review of selected items above a dollar threshold the client sets

The 2024 Uniform Guidance changes also raised several thresholds, so policies written before October 2024 are worth a fresh read.

How AwardNote uses this

Sources

All retrieved October 29, 2026.

• 2 CFR Part 200, Subpart E, Cost Principles (eCFR, current text): ecfr.gov
• 2 CFR 200.401, Application (eCFR): ecfr.gov
• 2 CFR 200.403, Factors affecting allowability of costs (eCFR): ecfr.gov
• 2 CFR 200.404, Reasonable costs (eCFR): ecfr.gov
• 2 CFR 200.405, Allocable costs (eCFR): ecfr.gov
• 2 CFR 200.410, Collection of unallowable costs (eCFR): ecfr.gov
• 2 CFR 200.420, Considerations for selected items of cost (eCFR): ecfr.gov
• 2 CFR 200.430, Compensation, personal services (eCFR): ecfr.gov
• 2 CFR 200.421, 200.423, 200.426, 200.432, 200.434, 200.438, 200.441, 200.442, 200.445, 200.449, 200.450, 200.454, 200.475 (eCFR, Subpart E): ecfr.gov
• 2 CFR 200.1, Definitions, including questioned cost and disallowed cost (eCFR): ecfr.gov
• 2 CFR 200.516, Audit findings (eCFR): ecfr.gov
• OMB, Guidance for Federal Financial Assistance, final guidance, 89 FR 30046 (Federal Register, April 22, 2024): Federal Register
• Federal Audit Clearinghouse, SF-SAC Section 3: Federal awards audit findings: fac.gov

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