Allowable Costs & Prior Approvals

Pertinent Regulations

Basic Considerations (2 CFR 200.402-200.411)
Definition of “prior approval” (2 CFR200.407)
Classification of Costs (2 CFR 200.412)
Direct Costs (2 CFR 200.413)
Indirect Costs (2 CFR 200.414)
Documentation (Records) (2 CFR 200.302(b))
Retention requirements for records (2 CFR 200.334)

Commentary on Allowability

Because federal awards are (almost exclusively) cost reimbursement instruments, and because only allowable costs can be reimbursed, the issue of cost allowability is critical for all recipients.

The regulations discussed on this site tell you how to ensure that costs you incur are allowable for reimbursement.

The Basic Considerations (see above) tell us the fundamental requirements that make a cost allowable:

  • It must be necessary for the completion of the funded activity.
  • It must be reasonable in amount, under the circumstances prevailing when it is incurred.
  • It must satisfy all restrictions placed on allowability by the terms and conditions of the agreement.

Necessary and reasonable may seem somewhat vague, as concepts. What's "reasonable and necessary" to one person may not seem so to another. Who decides? The regulation tells us that these two conditions are determined as they would be by a prudent person subject to the circumstances prevailing at the time the cost is incurred. This is sometimes called the prudent person test. But again, who actually decides? It happens on three tiers:

  • The recipient incurring the cost decides, and recipients should require internal approvals of all costs incurred in order to assure that they can be defended as reasonable and necessary.
  • An auditor will likely review the cost, and auditors may demand that the recipient explain and defend its rationale for calling the cost reasonable and necessary.
  • The Agreement Officer will review costs that are questioned by an auditor and make the final determination as to whether a cost is reasonable and/or necessary.

So you can see how it is important that your (the recipient's) policies are written and enforced in ways that assure that the AO (the ultimate "prudent person") will agree with your assertion that a cost is reasonable and necessary.

Satisfying the restrictions imposed by the agreement is more straightforward. Restrictions come in two basic varieties:

  • patently disallowing certain costs; and
  • allowing certain costs only when specific requirements are met, often including obtaining the funder's approval for the cost prior to incurring it. Which brings us to…

Commentary on Prior Approval

You want to avoid incurring unallowable costs. And for many of those costs, the basic condition of allowability is prior funder approval.

The definitive, over-arching statement on prior approval is found at 2 CFR 200.407. This is where we learn not only what counts as prior written approval of the costs or actions that require such approval, but also that we might expect to encounter unusual costs and that it's smart to negotiate a prior written understanding with the AO in order to assure the allowability of such costs.

I've identified 49 individual instances in 2 CFR 200 that either explicitly require prior funder approval or that strongly imply the need for prior approval by authorizing the funder to deny allowability of a cost. See this list of required prior approvals.

And keep in mind that your award agreement will tell you if any of those prior approvals are already granted and/or if any additional prior approval requirements are imposed.

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