Direct, Allowable, and Allocable Costs

What are direct costs?

Direct Costs are those 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.  (OMB A-21.D.1)

What are allowable costs?

Allowable costs are those costs subject to reimbursement if they are (a) reasonable (a prudent business person would have purchased this item and paid this price), (b) allocable (assignable), and (c) consistently treated.  Unallowable costs are those that are not reasonably and directly related to the project and those deemed unallowable by the sponsor.  Therefore they are not eligible for reimbursement.

"Allowable" applies also to activities (something you do) as well as costs (something you buy; a line item).  See OMB A-21: C-8 & J. 

Generally it is not the type of cost that determines allowability.  It is the purpose and circumstance of the expenditure.  Many categories of costs are allowable as a direct or indirect (F&A), e.g., salaries, travel, materials, etc.

Some examples of unallowable costs are found in OMB A-21: C-8 & J.  They are alcoholic beverages, entertainment (TRIO is the exception with an agenda and substantiation of a business purpose), fines and penalties, promotional materials, certain recruitment costs, organized fund raising, lobbying, commencement and convocation, general public relations and alumni activities, student activities, managing investments solely to enhance income, and prosecuting claims against the federal government and more.  (OMB A-21: C-8a-d; & J)

What are allocable costs?

Allocable means that the cost must benefit the account to which it is charged in proportion to the benefit that it provides.  According to OMB A-21C4, a cost is allocable if:

	●	it is incurred solely to support work under the sponsored agreement;
	●	it benefits both the sponsored agreement and other work of the institution, in proportions that can be approximated through the use of reasonable methods;
	●	it is necessary for the overall operation of the institution and is deemed assignable in part to sponsored projects.  (In other words, if the cost provides a benefit to a project equal to 50 percent of the cost, then only 50 percent should be charged to that project.)
	●	any cost that is allocable to a federally sponsored agreement may not be shifted to another sponsored agreement to meet deficiencies caused by cost overruns or other funding considerations.

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