Unlocking the Grants Puzzle: Understanding the Allowability of Costs

One of the most common questions grants professionals face is: “Can I charge this cost to my grant?”

It sounds straightforward, but anyone who has managed federal awards knows it’s rarely that simple. Between the Uniform Guidance, agency-specific requirements, and your own organization’s policies, determining whether a cost is allowable can feel like navigating a maze.

In fact, misunderstanding the rules is one of the fastest ways organizations end up with disallowed costs, audit findings, or even funding clawbacks.

That’s why in this week’s Grants Management Experts podcast, I’m unpacking 2 CFR 200.403 — Factors Affecting Allowability of Costs. This regulation outlines the standards every expense must meet before it can be charged to a federal award. Below, I’ll share key takeaways from the episode to help you strengthen compliance in your own work.

Why Cost Allowability Matters

At its core, cost allowability is about stewardship. Federal funds are taxpayer dollars, and funders expect them to be spent responsibly, consistently, and transparently.

When costs are misclassified or charged incorrectly, the consequences can be severe:

• Disallowed costs that your organization must repay.

• Audit findings that damage credibility and can trigger additional oversight.

• Jeopardized funding, making future awards harder to secure.

Understanding the rules up front not only protects your organization—it also frees you to focus on program impact without the constant worry of compliance missteps.

The Seven Factors of Cost Allowability

According to 2 CFR 200.403, every cost charged to a federal award must meet specific criteria. Here’s a breakdown in plain language:

1. Necessary and Reasonable
   The expense must be essential to achieving the objectives of the funded project. Ask yourself: Would a prudent person see this as a sensible and necessary cost? If the answer is no, it doesn’t belong in your budget.
   

2. Conformance to Terms and Conditions
   Even if something feels necessary, it might still be unallowable if explicitly excluded in the grant terms. For example, some awards prohibit charging food or entertainment under any circumstances. Always check the fine print.
   

3. Consistency with Policies and Procedures
   Your organization’s policies must apply across the board. If you reimburse travel on an actual-cost basis internally, you can’t suddenly switch to per diem just because federal funds are involved.
   

4. Consistent Treatment
   Similar costs must be treated the same way across all projects. Office supplies, for instance, can’t be direct costs on one grant but indirect costs on another without justification.
   

5. Compliance with GAAP
   All costs must follow Generally Accepted Accounting Principles (GAAP). This ensures proper accounting treatment and financial transparency.
   

6. No Double Dipping
   A single cost cannot be charged to more than one award, even partially. Every expense must be allocated fairly and only once.
   

7. Adequate Documentation
   Receipts, invoices, justifications, and approvals must be kept on file. Documentation is the evidence you’ll need in an audit to defend your decisions.
   

The Special Case of Closeout Costs

One area that often causes confusion is administrative closeout costs. Section H of the regulation allows organizations to incur costs like final reporting, staff time, or consultant fees after the project period ends.

But here’s the catch: these costs must be liquidated before you submit the final federal report—unless the agency gives you other instructions.

Failing to properly document and settle closeout costs can result in delays, rejected reports, or noncompliance findings. Planning for closeout expenses early helps avoid last-minute headaches.

Practical Tips for Staying Compliant

Regulations can feel abstract until you apply them. Here are a few practical strategies you can start using today:

• Ask the right question first: Before approving any cost, ask, “Is this essential for achieving project goals?” If not, it doesn’t pass the “necessary and reasonable” test.
  

• Review award terms upfront: Every award has unique restrictions. Highlight them during onboarding so your team knows what’s off-limits.
  

• Standardize policies: Ensure your finance and program teams follow consistent practices across all projects. This prevents accidental discrepancies.
  

• Document everything: Don’t just file receipts—include notes explaining why the cost was charged to the award. Future you (and your auditors) will thank you.

Plan for closeout early: Set aside staff time and resources for reporting and administrative wrap-up. Treat closeout as part of the project lifecycle, not an afterthought.

Why This Knowledge Empowers You

Understanding cost allowability isn’t just about checking a compliance box. It’s about building credibility with funders, protecting your organization from financial risk, and creating smoother processes for your team.

The more confident you are in applying these principles, the more time you free up to focus on what truly matters: delivering impact to your communities.

Final Thoughts

Navigating the allowability of costs may seem daunting, but with planning, consistency, and documentation, you can approach grant management with clarity and confidence.

If you’re a grant administrator, finance manager, or program lead, I encourage you to listen to the full Grants Management Experts episode. It’s packed with real-world examples, explanations of the CFR language, and practical tips to help you avoid costly mistakes.

Listen to the Grants Management Experts podcast here.