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CPE for Government Auditors

Selected Items of Cost – Overview

Please enjoy this chapter from the self-study book, “New Uniform Guidance: Cost Principles for Non-Profits and Governments” by Sefton Boyars and Bill Allen. If you want to earn credit for reading – see this link:



  • Distinguish which costs are usually allowable and which are unallowable


General Provisions for Selected Items of Cost

We have completed our discussion on the general principles for allowability and now will move on to specific items of cost.

2 CFR 200 Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, Subpart E (Cost Principles), provides guidance for selected items of cost.

The types of cost vary due to different organizational types (governmental units vs. nonprofit organizations).  Some types of cost are applicable to only one type of organization.  For example, costs associated with trustees do not affect governmental units but do affect nonprofit organizations.

2 CFR 200, Subpart E, provides excellent references regarding the allowability of costs.  While the general principles cover all costs, guidance regarding the selected items of cost in Subpart E is very useful in managing the financial aspects of federal projects.

General Provisions for Selected Items of Cost
§200.420 Considerations for selected items of cost.
§200.421 Advertising and public relations.
§200.422 Advisory councils.
§200.423 Alcoholic beverages.
§200.424 Alumni/ae activities.
§200.425 Audit services.
§200.426 Bad debts.
§200.427 Bonding costs.
§200.428 Collections of improper payments.
§200.429 Commencement and convocation costs.
§200.430 Compensation—personal services.
§200.431 Compensation—fringe benefits.
§200.432 Conferences.
§200.433 Contingency provisions.
§200.434 Contributions and donations.
§200.435 Defense and prosecution of criminal and civil proceedings, claims, appeals and patent infringements.
§200.436 Depreciation.
§200.437 Employee health and welfare costs.
§200.438 Entertainment costs.
§200.439 Equipment and other capital expenditures.
§200.440 Exchange rates.
§200.441 Fines, penalties, damages and other settlements.
§200.442 Fund raising and investment management costs.
§200.443 Gains and losses on disposition of depreciable assets.
§200.444 General costs of government.
§200.445 Goods or services for personal use.
§200.446 Idle facilities and idle capacity.
§200.447 Insurance and indemnification.
§200.448 Intellectual property.
§200.449 Interest.
§200.450 Lobbying.
§200.451 Losses on other awards or contracts.
§200.452 Maintenance and repair costs.
§200.453 Materials and supplies costs, including costs of computing devices.
§200.454 Memberships, subscriptions, and professional activity costs.
§200.455 Organization costs.
§200.456 Participant support costs.
§200.457 Plant and security costs
§200.458 Pre-award costs.
§200.459 Professional service costs.
§200.460 Proposal costs.
§200.461 Publication and printing costs.
§200.462 Rearrangement and reconversion costs.
§200.463 Recruiting costs.
§200.464 Relocation costs of employees.
§200.465 Rental costs of real property and equipment
§200.466 Scholarships and student aid costs.
§200.467 Selling and marketing costs.
§200.468 Specialized service facilities.
§200.469 Student activity costs.
§200.470 Taxes (including Value Added Tax).
§200.471 Termination costs.
§200.472 Training and education costs.
§200.473 Transportation costs.
§200.474 Travel costs.
§200.475 Trustees.


Change in Terminology 

Before we continue, it is important to recognize a change in the regulation’s terminology.  When discussing the Basic Considerations in regard to allowability, the regulations state that to be allowable, a cost has to meet all of the criteria we discussed (reasonable, allocable, consistent, etc.).  However, when discussing allowability in the General Provisions for Selected Items of Cost, the meaning of “allowable” changes.  The differentiation in meaning applies to costs, whether or not they are treated as direct costs or indirect costs.

§200.420 Considerations for selected items of cost.
This section provides principles to be applied in establishing the allowability of certain items involved in determining cost, in addition to the requirements of Subtitle II. Basic Considerations of this subpart. These principles apply whether or not a particular item of cost is properly treated as direct cost or indirect (F&A) cost.  Failure to mention a particular item of cost is not intended to imply that it is either allowable or unallowable; rather, determination as to allowability in each case should be based on the treatment provided for similar or related items of cost, and based on the principles described in §§200.402 Composition of costs through 200.411 Adjustment of previously negotiated indirect (F&A) cost rates containing unallowable costs.  In case of a discrepancy between the provisions of a specific Federal award and the provisions below, the Federal award governs. Criteria outlined in §200.403 Factors affecting allowability of costs must be applied in determining allowability.  See also §200.102 Exceptions.[1]

While the cost principles state that “communication costs” (e.g., telephone costs) are allowable, they don’t mean allowable in same sense that they mean it in Basic Considerations. Communication costs that are not allocable or are unreasonable in amount would clearly be unallowable.

So when you see a statement in General Provisions for Selected Items of Cost indicating that a certain type of cost is allowable, read that it is “permissible.”  That is, a grantee can claim such a type of cost provided that it meets the general principles including acceptability in that particular grant.

Consider Context

When researching the allowability of an individual cost item, it is important to consider the context in which the expenditure was made.

For example, advertising is generally unallowable.  Suppose the organization decides to print its own ads in-house.  Someone could easily look to supplies costs, printing costs, and mailing costs and see that there are no problems cited with any of such costs.  They would then assume that the advertising costs were allowable.  But the costs of developing the ads would be unacceptable, regardless of whether the ads were produced in-house or by an ad agency.

In the same vein, fund raising is generally unallowable, yet professional services are generally permissible.  You cannot assume that hiring an outside professional to perform fund raising will make the cost of that service allowable.  (Similarly, hiring a professional hit man would not make a deliberate killing acceptable.)  You should always consider the purpose of incurring the cost rather than just the items purchased.

Unallowable Costs

Under the cost principles, some items of cost are almost always unallowable.  There may be good reason for some, and some may seem burdensome. Regardless, the grantee must comply with the rules.  In many cases, seemingly unreasonable determinations regarding the unallowability of certain costs arose as a result of past scandals.

Alcoholic Beverages

To some, a glass of wine with dinner would be appropriate, even beneficial.  (Under the old definition, a Puritan is someone who is concerned that someone else, somewhere, is having fun.)  One could even argue that a glass of wine is far healthier than a fast food hamburger.  But the arguments are moot.  The rule is clear.  For whatever reason, alcoholic beverages are simply unallowable.

§200.423 Alcoholic beverages.
Costs of alcoholic beverages are unallowable.

However, as we mentioned earlier, a specific prior approval will overcome the restriction.  For example, alcoholic beverages would have to be permitted if we were conducting research on the effect of alcohol on driving.  The grant award in this case would have a specific provision that would take precedence over the cost principles.

While teaching a class a few years ago, I mentioned the need to be oh so very careful with costs that would be of interest to the media.  One student presented a case in point which also involved alcohol.

This student had worked at a state university that received a number of federal research grants. One of the departments had a medium-sized research lab that earned about $3 million in annual revenues.  One day, the lab’s researchers had a staff meeting and, afterwards, the lab hosted the attendees to dinner at a nice restaurant.  They purchased a couple bottles of wine during dinner and charged the alcohol to a fund controlled by the lab.

The local newspaper learned about the wine and made it a cause célèbre. Even though the alcohol was not charged to a federal grant, editorials thundered that state research funds were not to be squandered on wine.  As a result, the research lab was closed!  That is an extreme result of the lab researchers failing to consider potential consequences of their actions.

Uncollectible costs

Under the cost principles in effect before the Supercircular, bad debt expense was unallowable.  That was frequently interpreted to mean that costs incurred in any attempt to collect overpayments (that is how most bad debts occur under federal grants) were unallowable.

The cost principles contained in the Supercircular are more realistic though.  They do not consider costs to recover overpayments to be unallowable.  They do state, however, that once debts have been determined to be uncollectible, then any costs of attempted recovery are unallowable.  That makes sense.  After all, once a debt is considered to be uncollectible, why spend money attempting to secure repayment?

§200.426 Bad debts.
Bad debts (debts which have been determined to be uncollectable), including losses (whether actual or estimated) arising from uncollectable accounts and other claims, are unallowable. Related collection costs, and related legal costs, arising from such debts after they have been determined to be uncollectable are also unallowable.  See also §200.428 Collections of improper payments.



Contingencies are “what-ifs.”  Earthquakes are a fact of life in California, just as tornadoes are in Oklahoma or hurricanes in Florida.  But grantees cannot make an arbitrary charge to grants on an unsubstantiated estimate as to the likelihood of a natural disaster occurring.  Grants can be charged only with “what-ifs” that can be predicted on an actuarial basis[2].

§200.433 Contingency provisions.
(c)  Payments made by the Federal awarding agency to the non-Federal entity’s “contingency reserve” or any similar payment made for events the occurrence of which cannot be foretold with certainty as to the time or intensity, or with an assurance of their happening, are unallowable, except as noted in §§200.431 Compensation—fringe benefits regarding self‑insurance, pensions, severance and post-retirement health costs and 200.447 Insurance and indemnification.



A grantee can, of course, contribute to any charity it chooses.  It cannot, however, decide to expend the federal government’s funds on such charities.

§200.434 Contributions and donations.
(a)             Costs of contributions and donations, including cash, property, and services, from the non-Federal entity to other entities, are unallowable.


No fun!  Sorry about that.  Determining when costs meet the definition of “entertainment” can be difficult.

§200.438 Entertainment costs.
Costs of entertainment, including amusement, diversion, and social activities and any associated costs are unallowable, except where specific costs that might otherwise be considered entertainment have a programmatic purpose and are authorized either in the approved budget for the Federal award or with prior written approval of the Federal awarding agency.

However, when costs may be interpreted as entertainment, you should consider the “newspaper test” that we discussed earlier. You should always ask yourself:  ”If the local media discovered what we are doing, would they likely print it in the first three pages of the paper?”  If so, you probably should not do it.  If you think outside reviewers might classify your expenditures as entertainment costs, you probably should discuss your concerns with coworkers to obtain different points of view.

Generally, we recommend being very conservative in incurring costs that may be considered entertainment.  If a grants officer fails to notice such a cost and an outsider (e.g., an auditor) then finds it, that grants officer will suffer embarrassment.  You never want to cause persons providing you with funding to have negative experiences.  That can seriously impact future relationships with those persons.

Fund Raising

An organization must foot the bill for its fund raising activities.  That is the rule.  The costs are not allocable directly or indirectly to grants, as there is no benefit to the projects.  In fact, if the fund raising is conducted internally, fund raising costs may be required to absorb some of the organization’s indirect costs.

§200.442 Fund raising and investment management costs.
(a) Costs of organized fund raising, including financial campaigns, endowment drives, solicitation of gifts and bequests, and similar expenses incurred to raise capital or obtain contributions are unallowable. Fund raising costs for the purposes of meeting the Federal program objectives are allowable with prior written approval from the Federal awarding agency. Proposal costs are covered in §200.460 Proposal costs.


Goods or Services for Personal Use 

This one should be obvious.  People are put in jail or fined for the unauthorized taking of an organization’s good for their personal use.  We call it misappropriation of funds.

In other cases, though, it is not embezzlement.  Personal use of assets may be included in the organization’s policies.  For example, some entities provide a car for their top managers as part of their pay package.  The regulations, however, provide that costs of an organization’s automobiles for an employee’s personal use are unallowable, even if the costs are considered part of the employee’s compensation package and are taxable to the employee.

§200.445 Goods or services for personal use.
(a) Costs of goods or services for personal use of the non-Federal entity’s employees are unallowable regardless of whether the cost is reported as taxable income to the employees.
(b) Costs of housing (e.g., depreciation, maintenance, utilities, furnishings, rent), housing allowances and personal living expenses are only allowable as direct costs regardless of whether reported as taxable income to the employees.  In addition, to           be allowable direct costs must be approved in advance by a Federal awarding agency.


Under-Recovery on Other Federal Grants

As discussed previously, you cannot transfer costs from one grant to another to cover overspending on a grant.  The general cost principle that applies here is allocability.  If a cost applies to one grant, you cannot charge it to another grant.  Over the years, this has been a recurring problem for grantees who receive numerous grants.  As a result, millions of dollars have been repaid to the federal government.

§200.405 Allocable costs.
            (c)  Any cost allocable to a particular Federal award under the principles provided for in this part may not be charged to other Federal awards to overcome fund deficiencies, to avoid restrictions imposed by Federal statutes, regulations, or terms and conditions of the Federal awards, or for other reasons. However, this prohibition would not preclude the non-Federal entity from shifting costs that are allowable under two or more Federal awards in accordance with existing Federal statutes, regulations, or the terms and conditions of the Federal awards.

During audits of large universities that receive hundreds, or even thousands, of grants, it was not uncommon to discover grantees making unallowable transfers between grants.  Grantees would transfer costs away from over-expended grants to grants with fund balances.  At times, we would question millions of dollars of these transfers.

One such university had transferred over $30,000,000 of costs in this manner over a three-year period.  The grantee had adjusted employees’ salary charges using four decimal points more than three months after the fact.  In other words, an employee’s charges to a grant were changed from, say, 25% of total time to 23.61% of total time.  Could you estimate your time from three months earlier to four decimal places?  I didn’t think so! By making these adjustments, each of the university’s grants ended up within one cent of the budgeted amount.  I recommended that, instead, they use five decimal points to avoid the one-cent overage or underage.  They were not amused by my comment.

During negotiations, the university representative could not pass the red-faced test.  He could not look people in the eye and say with a straight face that it was pure coincidence that the transfers resulted in the booked costs equaling the budgeted cost in virtually every case.  The university had to repay over $30,000,000 to the federal government.

State and Local Governments’ General Governmental Costs are Unallowable

For state and local governments, the cost principles prohibit charges to federal awards for “general government” costs.  General governmental costs include expenses for:

  • State governor, or local equivalent,
  • Legislature,
  • Judiciary,
  • Prosecution, and
  • General public support (e.g., police and fire).

However, the awarding federal agency may approve travel costs of such government employees if they are related to a specific award.

§200.444 General costs of government.
            (a) For states, local governments, and Indian Tribes, the general costs of government are unallowable (except as provided in §200.474 Travel costs). Unallowable costs include:
               (1) Salaries and expenses of the Office of the Governor of a state or the chief executive of a local government or the chief executive of an Indian tribe;
               (2) Salaries and other expenses of a state legislature, tribal council, or similar local governmental body, such as a county supervisor, city council, school board, etc., whether incurred for purposes of legislation or executive direction;
               (3) Costs of the judicial branch of a government;
               (4) Costs of prosecutorial activities unless treated as a direct cost to a specific program if authorized by statute or regulation (however, this does not preclude the allowability of other legal activities of the Attorney General as described in §200.435 Defense and prosecution of criminal and civil proceedings, claims, appeals and patent infringements); and
               (5) Costs of other general types of government services normally provided to the general public, such as fire and police, unless provided for as a direct cost under a program statute or regulation.
            (b) For Indian tribes and Councils Of Governments (COGs) (see §200.64 Local government), the portion of salaries and expenses directly attributable to managing and operating Federal programs by the chief executive and his or her staff is allowable. Up to 50% of these costs can be included in the indirect cost calculation without documentation. 


It is important to emphasize here that, as we noted earlier, program rules will override the general cost principles, as will specific grant terms and conditions.  Accordingly, while the general cost principles prohibit charges for the police department, for example, the U.S. Department of Justice awards grants to police departments under its various grant programs.  There would be no problem in such a situation because the program regulations would take priority over the cross-cutting cost principles.

[1] §200.102 Exceptions.
(a)   With the exception of Subpart F— Audit Requirements of this part, OMB may allow exceptions for classes of Federal awards or non-Federal entities subject to the requirements of this part when exceptions are not prohibited by statute. However, in the interest of maximum uniformity, exceptions from the requirements of this part will be permitted only in unusual circumstances…
(b)   Exceptions on a case-by-case basis for individual non-Federal entities may be authorized by the Federal awarding agency or cognizant agency for indirect costs except where otherwise required by law or where OMB or other approval is expressly required by this part…
[2] §200.433 Contingency provisions.  
(b) It is permissible for contingency amounts other than those excluded in paragraph (b)(1) of this section to be explicitly included in budget estimates, to the extent they are necessary to improve the precision of those estimates.   Amounts must be estimated using broadly-accepted cost estimating methodologies, specified in the budget documentation of the Federal award, and accepted by the Federal awarding agency. … 
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