Is this cost allowable on a federal grant? Seven tests to run before you spend
Run any cost through seven tests before it is charged to a federal award: it must be necessary, reasonable and allocable, fit the award's own limits, be treated consistently, not be funded twice, and be documented. Here are the tests in order, with the sentence of 2 CFR Part 200 behind each one.
The seven tests
- Read your own award first. Section 200.403(b) says a cost must conform to any limits or exclusions in the federal award itself as to types or amounts of cost items. Open the award terms and the approved budget and look for a line, a cap or a named exclusion. If the award is silent, go on. If it is not silent, the award wins.
- Is it necessary and reasonable for the award? Under 200.403(a) the cost must be necessary and reasonable for performing the award. Section 200.404 says a cost is reasonable if it does not exceed what a prudent person would incur under the circumstances when the decision was made. It lists what to weigh: whether the cost is ordinary and necessary for the work, sound business practice and arm's-length bargaining, market prices for comparable costs in your area, whether the people involved acted prudently, and whether it departs from your own written policies.
- Is it allocable to this award? Section 200.405(a) says a cost is allocable when it is assignable to the award in line with the relative benefits received. That is met if the cost was incurred specifically for the award, benefits the award and other work and can be split in proportions approximated by reasonable methods, or is necessary to the overall operation and assignable in part to the award. If a cost benefits two or more projects in proportions you can determine without undue effort, 200.405(d) says to split it by proportional benefit.
- Do you treat it the same way everywhere? Sections 200.403(c) and (d) require consistency with your policies for federally and non-federally funded activities, and consistent treatment. The rule's own example: a cost must not be charged to the award as a direct cost if another cost for the same purpose in like circumstances was charged to it as an indirect cost.
- Is it already paid for by another federal source? Section 200.403(f) says a cost must not be included as a cost or used to meet cost sharing of any other federally financed program, in the current or a prior period. Section 200.405(c) adds that a cost allocable to one federal award may not be shifted to another to cover a shortfall or avoid a restriction.
- Does the timing work? Under 200.403(h), administrative closeout costs may be incurred until the due date of the final reports, and must be liquidated before that date. All other costs must be incurred during the approved budget period. Check the invoice date and the service date against the award's dates, not the payment date.
- Can you document it today? Section 200.403(g) requires adequate documentation. For you that is an invoice or receipt, proof of payment, a note of who approved it and why it serves the award, and, for a shared cost, how you split it. If you cannot write that down now, do not charge it yet.
This page describes the federal cost principles in 2 CFR Part 200, subpart E, as read on 2026-11-09. Your award agreement controls. Foundations, states and pass-through entities often set their own rules, and some adopt these. It is a working method, not legal, audit or compliance advice. Ask your funder in writing when in doubt.
Costs the rules name as unallowable or restricted
Beyond the seven tests, subpart E has a section for many specific cost types. A few that small nonprofits run into, as read on 2026-11-09:
| Cost | What the section says | Section |
|---|---|---|
| Alcoholic beverages | Unallowable. | 200.423 |
| Entertainment | Unallowable unless it has a specific and direct programmatic purpose and is included in the award. | 200.438(a) |
| Fines and penalties | Costs from violations, alleged violations or failure to comply with laws and regulations are unallowable, except when incurred as a result of specific provisions of the award or with the agency's prior written approval. | 200.441 |
| Advertising | Only allowable when solely for the recruitment of personnel for the award, procurement of goods and services for it, disposal of scrap or surplus, or program outreach and other specific purposes necessary to meet the award's requirements. | 200.421(b) |
| Lobbying | Certain costs of influencing activities tied to obtaining awards, and costs of improperly influencing federal executive branch employees, are unallowable. Read the whole section before any advocacy work. | 200.450 |
That is a sample, not a list. The cost principles run from 200.420 to 200.476, and a cost type not named there still has to pass the seven tests. When your cost has its own section, read that section before you charge it.
A worked example (made-up award)
A nonprofit's federal award pays for a tutoring program. In March the executive director wants to charge a $1,200 staff appreciation lunch to it. Test 2 stops it: nothing links the lunch to performing the award, and 200.438(a) treats entertainment and associated costs as unallowable unless they have a specific and direct programmatic purpose and are in the award. The same month the nonprofit pays a $900 software subscription used by the tutoring program and two other programs. It passes test 3 if the organization splits it by a documented, reasonable method, for example by active users, and charges the tutoring share. It records the method in the file, charges the same way every month (test 4), and saves the invoice and the split (test 7). One decision was no, one was yes with a written basis.
Common mistakes
- Treating the budget as the test. A cost can sit inside an approved budget line and still fail the reasonableness or documentation test.
- Deciding allowability after the money is spent. Section 200.302(b)(7) calls for written procedures for determining allowability. Decide first, then spend.
- Splitting shared costs differently each month. Pick a method, write it down and keep it. Inconsistent treatment is its own test.
- Using the payment date for timing. The question is when the cost was incurred, against the approved budget period.
- Assuming a funder who is not federal uses these rules. Some do by reference and some do not. The award terms say which.
Where to write the answer down
Keep one short cost-decision log per award: the date, the cost, which tests it met, who decided and where the backup is stored. When a cost needs the funder's input, ask in writing and file the reply with the log. For changes to the budget itself, see what a budget modification request says. For staff pay, see time and effort reporting. For turning allowed costs into a payment request, use the reimbursement request checklist.
The faster path, and what it does not do
GrantClose does not decide whether a cost is allowable and does not hold your accounting. What it does is keep the surrounding work from slipping: you can make the monthly cost review a deliverable with one owner and a due date, and attach the funder's written answer to a cost question as evidence on that deliverable, so it is in the closeout ZIP with a SHA-256 checksum when the award ends.
- It does not judge allowability, calculate indirect costs or tell you what to charge.
- It does not record dollar amounts, receipts for accounting, payroll or bank data. Keep those in your accounting system.
- It holds only what you upload, up to 15 MB per file. Do not upload health records, Social Security numbers, payment card data or client case files. The terms prohibit them.
GrantClose keeps evidence with each deadline and exports a closeout ZIP when the award ends. GrantClose never submits anything to a funder, writes your reports or gives legal, audit or compliance advice. Extracted dates are suggestions you confirm. Free for 1 active award. Create a free account
Questions
What makes a cost allowable on a federal grant?
Under 2 CFR 200.403 as read on 2026-11-09, a cost must be necessary and reasonable for the award and allocable to it, conform to the award's limits, be treated consistently, not be funded by another federal program, and be adequately documented, among other factors. Your award terms can add limits.
What does reasonable mean for a grant cost?
Section 200.404 says a cost is reasonable if it does not exceed what a prudent person would incur in the circumstances when the decision was made, and lists factors to weigh, including market prices and whether the cost departs from your own written policies.
Can I charge a cost to a grant if it is in the approved budget?
Not automatically. Being in the budget does not replace the other tests. A cost must also be reasonable, allocable, consistent and documented, and must fall in the approved budget period.
What if my grant is from a foundation, not the federal government?
Then 2 CFR Part 200 applies only if the agreement says so. Read the agreement for allowed and excluded costs and ask the program officer in writing when it is unclear.
What should I do when I am not sure a cost is allowable?
Ask the funder in writing before you spend, and file the answer with the award records. Where it is a pass-through award, ask the pass-through entity.
Sources read
- 2 CFR 200.403, factors affecting allowability of costs, read on 2026-11-09.
- 2 CFR 200.404, reasonable costs, read on 2026-11-09.
- 2 CFR 200.405, allocable costs, read on 2026-11-09.
- 2 CFR 200.421, advertising and public relations, read on 2026-11-09.
- 2 CFR 200.423, alcoholic beverages, read on 2026-11-09.
- 2 CFR 200.438, entertainment and prizes, read on 2026-11-09.
- 2 CFR 200.441, fines, penalties, damages and other settlements, read on 2026-11-09.
- 2 CFR 200.450, lobbying, read on 2026-11-09.
- 2 CFR 200.302, financial management, read on 2026-11-09.