Allowable, Allocable, and Reasonable Costs

A cost is allowable on a federal grant when it is necessary and reasonable for the award, allocable to it, treated consistently as direct or indirect under uniformly applied policies, determined under generally accepted accounting principles, not used as cost share elsewhere, and adequately documented.

Current figures — verified 2026-08-11

Item	Value	Source
De minimis indirect cost rate	Up to 15 percent of modified total direct costs	2 CFR 200.414(f)
Equipment definition threshold	Per-unit cost at or above the lesser of the entity’s capitalization level or $10,000	2 CFR 200.1
Prior written approval for special purpose equipment	Unit cost of $10,000 or more	2 CFR 200.439(b)
Lobbying time-record relief ceiling	25 percent or less of compensated hours in a calendar month	2 CFR 200.450(c)
Single Audit trigger	$1,000,000 in federal awards expended per fiscal year	2 CFR 200.501(a)

These figures change. Verify against the linked source before relying on them. Report an outdated figure

Key takeaways

• Allowability is a seven-part test, not a list of approved purchases.
• Reasonable means what a prudent person would have paid at the time.
• Allocable means charged in proportion to the benefit received.
• A few named items are unallowable outright: alcohol, fines, bad debts.
• A disallowed cost becomes a debt repayable with interest.

What are the criteria for an allowable cost?

An allowable cost is one that satisfies every criterion in the federal cost principles, not merely one or two. The criteria appear at 2 CFR 200.403, which governs every federal grant subject to the Uniform Guidance and sits at the center of budgets and grant finance. A cost must:

• Be necessary and reasonable for performance of the federal award, and allocable to it.
• Conform to limitations or exclusions in the cost principles or in the award terms as to types or amount of cost items.
• Be consistent with policies and procedures that apply uniformly to both federally financed and other activities of the organization.
• Be accorded consistent treatment. A cost cannot be charged as direct if a cost incurred for the same purpose in like circumstances has been allocated as indirect.
• Be determined in accordance with generally accepted accounting principles, with limited variation for states, local governments, and Indian Tribes.
• Not be used to meet cost sharing requirements of any other federally financed program, in the current or a prior period.
• Be adequately documented.

An eighth requirement governs timing: costs must be incurred during the approved budget period, except that administrative closeout costs may be incurred until the final reports are due and must be liquidated by that date.

Two consequences follow that people miss. First, allowability is not a property of a category of spending; the same purchase can be allowable on one award and unallowable on another because the terms differ. Second, the cost principles do not attempt to name every possible cost — the selected items sections cover common problem areas, and “failure to mention a particular item of cost is not intended to imply that it is either allowable or unallowable” (2 CFR 200.420). Silence is not permission.

What do reasonable and allocable mean precisely?

Reasonable and allocable are the two criteria with formal regulatory definitions, and both are tests rather than thresholds. A reasonable cost is bounded by prudence; an allocable cost is bounded by benefit received.

The reasonableness standard uses the prudent-person framing: “A cost is reasonable if it does not exceed an amount that a prudent person would incur under the circumstances prevailing when the decision was made to incur the cost” (2 CFR 200.404). The phrase about the time the decision was made is load-bearing: reasonableness is judged against what was known then, not against hindsight.

The same section lists five considerations. Whether the cost is generally recognized as ordinary and necessary. Sound business practice, arm’s-length bargaining, applicable law, and award terms. Market prices for comparable goods or services in the geographic area. Whether the individuals involved acted with prudence given their responsibilities to the organization, its employees, the public, and the federal government. And whether the cost represents a deviation from the organization’s own established written policies and procedures.

Allocability turns on benefit rather than price. A cost is allocable to a federal award “if the cost is assignable to that Federal award or other cost objective in accordance with the relative benefits received” (2 CFR 200.405). A cost qualifies if it is incurred specifically for the award; benefits both the award and other work and can be distributed in reasonable proportions; or is necessary to the overall operation of the organization and assignable in part to the award.

One prohibition inside the allocability rule generates a large share of audit findings. Costs allocable to one federal award may not be charged to another to cover funding shortfalls, to avoid restrictions imposed by law or by the award terms, or for reasons of convenience. Moving a cost because one award has money left is not an accounting choice; it is a compliance failure.

Which costs are never allowable on a federal grant?

Some costs are unallowable outright, regardless of how reasonable they seem or how well they are documented. An organization may still incur them with non-federal money — unallowable means it cannot be charged to a federal award, directly or indirectly, not that the activity is prohibited.

Seven categories account for most outright disallowances:

• Alcoholic beverages. “The cost of alcoholic beverages is unallowable” (2 CFR 200.423). The common real-world violation is a catering invoice with an undifferentiated bar line, which must be split out and excluded from both direct charges and the indirect pool.
• Bad debts. Uncollectible accounts and other claims are unallowable, along with related collection costs and related legal costs (2 CFR 200.426).
• Entertainment. Amusement, diversion, and social activities and any associated costs, including gifts, are unallowable “unless they have a specific and direct programmatic purpose and are included in a Federal award” (2 CFR 200.438). Prizes and challenges follow the same programmatic-purpose test.
• Fines, penalties, damages, and settlements. Costs resulting from violations of, alleged violations of, or failure to comply with federal, state, local, tribal, or foreign law are unallowable, except when incurred as a result of complying with a specific provision of the award or with prior written agency approval (2 CFR 200.441).
• Organized fundraising. Financial campaigns, endowment drives, solicitation of gifts and bequests, and similar costs incurred to raise capital or obtain contributions are unallowable (2 CFR 200.442).
• Goods or services for personal use. Unallowable regardless of whether the cost is reported as taxable income to the employee (2 CFR 200.445). Housing and personal living expenses are allowable only as direct costs approved in advance by the agency.
• Contingency reserves. Payments to a contingency reserve, or similar payments for events whose occurrence cannot be foretold with certainty, are unallowable (2 CFR 200.433). Estimated contingency amounts may appear in a budget for certain project types when developed using broadly accepted estimating methodologies and approved by the agency, but the reserve itself is not a chargeable cost.

Which costs are allowable only under conditions?

Many costs are allowable but carry a condition — a purpose test, a prior-approval requirement, a documentation requirement, or a policy-consistency requirement. Conditional allowability generates more questioned costs than outright prohibitions, because the cost looks routine and the condition goes unmet.

Seven conditional categories recur:

• Conferences. A conference is defined as an event whose primary purpose is to disseminate technical information beyond the organization and that is necessary and reasonable for performance. Facility rental, speaker fees, attendance fees, meals and refreshments, and local transportation may be allowable, and hosts “must exercise discretion and judgment in ensuring that conference costs are appropriate, necessary, and managed to minimize costs” (2 CFR 200.432).
• Travel. The charging method — actual cost, per diem, mileage, or a combination — must be applied consistently to an entire trip and follow written policy. Airfare above the basic least expensive unrestricted accommodations class is unallowable except in named circumstances such as circuitous routing, unreasonable hours, or documented medical need (2 CFR 200.475).
• Equipment and capital expenditures. General purpose equipment, buildings, and land require prior written approval as direct costs; special purpose equipment requires prior written approval at the unit cost shown in the figures above. Equipment and other capital expenditures are unallowable as indirect costs (2 CFR 200.439).
• Participant support costs. Allowable, with the classification decision pushed onto the organization: it “must be documented in the recipient’s or subrecipient’s written policies and procedures and treated consistently across all Federal awards” (2 CFR 200.456). Participant support is excluded from the modified total direct cost base, so no indirect is recovered on it unless a negotiated agreement provides otherwise.
• Pre-award costs. Allowable only where necessary for efficient and timely performance, only to the extent they would have been allowed after the start date, and “only with the written approval of the Federal agency” (2 CFR 200.458). The widely repeated ninety-day pre-award authority is an agency expanded authority exercised at the recipient’s own risk, not a provision of the cost principles.
• Memberships and subscriptions. Organizational memberships in business, technical, and professional organizations and subscriptions to their periodicals are allowable; memberships in country clubs and social or dining clubs are unallowable, as are memberships in organizations whose primary purpose is lobbying (2 CFR 200.454).
• Advertising and public relations. Allowable only for recruitment of personnel, procurement of goods and services, disposal of surplus materials, and program outreach required by the award. Promotional items, memorabilia, and messaging designed to promote the organization generally are unallowable (2 CFR 200.421).

How do lobbying and fundraising rules limit allowable costs?

Lobbying and fundraising are the two unallowable activities most likely to be embedded in an otherwise ordinary budget, because both look like legitimate program work from the inside. Both are also cost objectives in their own right, which changes how indirect costs are calculated.

Lobbying costs are unallowable across a broad range: influencing the outcome of elections through contributions, endorsements, or publicity; establishing or funding political parties, campaigns, or political action committees; attempting to influence the introduction, enactment, or modification of federal or state legislation; and legislative liaison activities undertaken in preparation for those efforts (2 CFR 200.450). Named exceptions exist — technical and factual presentations on topics directly related to award performance made in response to a documented request from a legislative body, lobbying to reduce cost or prevent material impairment of the organization’s authority to perform the award, and activities specifically authorized by statute.

A documentation relief provision applies below the compensated-hours ceiling shown in the figures above, provided the organization has not materially misstated lobbying costs in the preceding five years. Above it, detailed time records are required.

Fundraising carries a second-order consequence that costs organizations real money. Fundraising costs come out of the indirect cost pool, but fundraising as an activity stays in the allocation base: “Both allowable and unallowable fundraising and investment activities must be allocated an appropriate share of indirect costs” (2 CFR 200.442). Removing the fundraising function from the base to make a rate look larger is a textbook audit finding, and the mechanics are covered under indirect cost rates and the de minimis option.

What happens when a cost is disallowed after the fact?

A disallowed cost becomes a debt. The sequence runs in three stages, and the organization has an opportunity to intervene at each one, which is why treating an early-stage challenge as final is a costly mistake.

The first stage is a questioned cost — an amount an auditor challenges because it appears to violate a provision, because supporting documentation is missing, or because the cost appears unreasonable. A questioned cost is an allegation, not yet an obligation.

The second stage is a management decision, issued by the federal awarding agency or the pass-through entity, which either sustains or rejects the questioned cost. Before issuing that decision, the agency or pass-through entity may request additional information or documentation from the auditee as a way of mitigating disallowed costs (2 CFR 200.521). Documentation produced after the audit can still reduce the amount at stake.

The third stage is a disallowed cost, at which point repayment is owed: “Payments made for costs determined to be unallowable by either the awarding Federal agency, cognizant agency for indirect costs, or pass-through entity must be refunded with interest to the Federal Government” (2 CFR 200.410).

The cash consequence is what makes allowability an operating concern rather than a paperwork concern. Money already spent on staff and vendors has to be repaid from unrestricted funds the organization may not have — one of several ways award compliance connects directly to grant cash flow. Findings also persist into future risk assessments and can trigger tighter award conditions, a pattern examined under internal controls for grant recipients.

This article is general information about federal cost principles, not accounting, tax, or legal advice. Allowability determinations depend on your specific award terms, your organization’s written policies, and your auditor’s judgment.

Frequently asked questions

Does unallowable mean the organization cannot spend the money at all?

No. An unallowable cost is one that cannot be charged to a federal award, directly or indirectly. The organization may still incur it with unrestricted or other non-federal funds. What the rule requires is that the cost be identified, excluded from federal charges and from the indirect cost pool, and tracked separately.

Can a cost be allowable on one grant and unallowable on another?

Yes. Award terms and program statutes impose limitations beyond the general cost principles, so the same purchase can be allowable under one award and barred under another. Consistency of treatment is still required: a cost cannot be direct on one award and indirect on another in like circumstances.

Are meals at a working meeting allowable?

It depends on whether the event meets the conference definition or has a specific and direct programmatic purpose included in the award. Routine meals for staff at an internal meeting generally fail both tests and read as entertainment. Meals at a technical dissemination event with an agenda and external participants generally pass.

Is a cost allowable just because the budget was approved?

Not automatically. Budget approval indicates the agency accepted the cost as proposed, which helps considerably, but allowability is tested against the criteria at the time the cost is incurred. A cost approved in a budget and then incurred outside the period of performance, or without required documentation, can still be questioned.

Can an unallowable cost be used to meet a match requirement?

No. Cost sharing contributions must be allowable under the cost principles, so an unallowable cost is unallowable in both directions. Over-the-cap salary, lobbying time, and alcohol cannot be counted as match, a point covered under cost share and matching requirements.

Related topics

• Budgets and Grant Finance — the hub for cost categories, indirect rates, match, and cash mechanics
• Writing a Budget Narrative
• Direct vs Indirect Costs
• The Single Audit

Sources

1. Electronic Code of Federal Regulations, 2 CFR 200.403, “Factors affecting allowability of costs.” https://www.ecfr.gov/current/title-2/section-200.403 (accessed 2026-08-11)
2. Electronic Code of Federal Regulations, 2 CFR 200.404, “Reasonable costs.” https://www.ecfr.gov/current/title-2/subtitle-A/chapter-II/part-200/subpart-E/subject-group-ECFRed1f39f9b3d4e72/section-200.404 (accessed 2026-08-11)
3. Electronic Code of Federal Regulations, 2 CFR 200.405, “Allocable costs.” https://www.ecfr.gov/current/title-2/section-200.405 (accessed 2026-08-11)
4. Electronic Code of Federal Regulations, 2 CFR 200.420, “Considerations for selected items of cost.” https://www.ecfr.gov/current/title-2/section-200.420 (accessed 2026-08-11)
5. Electronic Code of Federal Regulations, 2 CFR 200.423, “Alcoholic beverages.” https://www.ecfr.gov/current/title-2/section-200.423 (accessed 2026-08-11)
6. Electronic Code of Federal Regulations, 2 CFR 200.426, “Bad debts.” https://www.ecfr.gov/current/title-2/section-200.426 (accessed 2026-08-11)
7. Electronic Code of Federal Regulations, 2 CFR 200.432, “Conferences.” https://www.ecfr.gov/current/title-2/section-200.432 (accessed 2026-08-11)
8. Electronic Code of Federal Regulations, 2 CFR 200.433, “Contingency provisions.” https://www.ecfr.gov/current/title-2/section-200.433 (accessed 2026-08-11)
9. Electronic Code of Federal Regulations, 2 CFR 200.438, “Entertainment and prizes.” https://www.ecfr.gov/current/title-2/section-200.438 (accessed 2026-08-11)
10. Electronic Code of Federal Regulations, 2 CFR 200.439, “Equipment and other capital expenditures.” https://www.ecfr.gov/current/title-2/section-200.439 (accessed 2026-08-11)
11. Electronic Code of Federal Regulations, 2 CFR 200.441, “Fines, penalties, damages and other settlements.” https://www.ecfr.gov/current/title-2/section-200.441 (accessed 2026-08-11)
12. Electronic Code of Federal Regulations, 2 CFR 200.442, “Fundraising and investment management costs.” https://www.ecfr.gov/current/title-2/section-200.442 (accessed 2026-08-11)
13. Electronic Code of Federal Regulations, 2 CFR 200.450, “Lobbying.” https://www.ecfr.gov/current/title-2/section-200.450 (accessed 2026-08-11)
14. Electronic Code of Federal Regulations, 2 CFR 200.456, “Participant support costs.” https://www.ecfr.gov/current/title-2/section-200.456 (accessed 2026-08-11)
15. Electronic Code of Federal Regulations, 2 CFR 200.458, “Pre-award costs.” https://www.ecfr.gov/current/title-2/section-200.458 (accessed 2026-08-11)
16. Electronic Code of Federal Regulations, 2 CFR 200.475, “Travel costs.” https://www.ecfr.gov/current/title-2/section-200.475 (accessed 2026-08-11)
17. Electronic Code of Federal Regulations, 2 CFR 200.410, “Collection of unallowable costs.” https://www.ecfr.gov/current/title-2/section-200.410 (accessed 2026-08-11)
18. Electronic Code of Federal Regulations, 2 CFR 200.414, “Indirect costs.” https://www.ecfr.gov/current/title-2/section-200.414 (accessed 2026-08-11)
19. Electronic Code of Federal Regulations, 2 CFR 200.1, “Definitions” (Equipment; Modified Total Direct Cost). https://www.ecfr.gov/current/title-2/subtitle-A/chapter-II/part-200/subpart-A/section-200.1 (accessed 2026-08-11)
20. Electronic Code of Federal Regulations, 2 CFR 200.501, “Audit requirements.” https://www.ecfr.gov/current/title-2/section-200.501 (accessed 2026-08-11)