EMU Research

Allowability, Reasonableness and Assignment of Cost

When Eastern Michigan University accepts an award from a sponsor for specific a program or project EMU is required to manage those funds to ensure that all costs are either directly related to the project, or are allowable indirect costs charged in accordance with EMU's practice and its federally negotiated Facilities and Administrative Costs (F&A) rate agreement. This is accomplished by segregating a grant's revenue and expenses in its own restricted fund so that institutional oversight can occur. This policy addresses the appropriateness, reasonableness, and assignment of costs on sponsored contracts and projects.

EMU receives a substantial portion of its sponsored activity through federal awards. With accepting this funding, EMU agrees to abide by federal regulations governing things, such as the allowability of specific items of cost. OMB Circular A-21 requires that EMU treat expenses consistently regardless of the source of funding.

Allowable Costs

All costs must be allowable under federal regulations, including program specific terms and conditions sponsor's terms, and university policy. To be allowable costs must be:

• Reasonable and necessary
• Allocable to a specific sponsored program
• Treated consistently as direct or indirect cost by the University, and
• Conform to any limits or exclusions set forth in federal regulations, or the terms and conditions of the sponsored award.

OMB Circular A-21 Section J spells out in detail the appropriateness of particular elements of cost. Section J should be reviewed by the PI prior to incurring the costs. If the cost is questionable, the PI should consult with his/her Post Award Manager about the cost before it is incurred.

Costs that are typically charged as direct costs to sponsored fund/contract include:

• Compensation of employees whose service provides a direct benefit to the sponsored program, including fringe benefits.
• Costs of material expended or consumed for the direct benefit of the project.
• Travel in accordance with Eastern Michigan University policy and sponsored allowable travel expense.
• Other allowable items or expenses that were incurred for direct benefit to the sponsored program.

Reasonable and Necessary Costs

Federal Regulations define a cost as reasonable if the goods and services, and the amount involved, reflect the actions that a prudent person would have taken under the prevailing circumstances when the decision to incur the cost was made.

Important considerations in determining the reasonableness of costs are:

• Is the cost generally recognized as necessary for the performances of the sponsored program?
• Have all of the requirements or restraints by federal or state laws and regulations, sponsored agreement terms, and conditions been satisfied?
• Is the actions taken with respect to the incurrence of cost, consistent with established institutional policies and procedures?

Allocable Costs

A cost is allocable to a particular sponsored program if the goods or services involved can be charged or assigned to the program in proportion with the relative benefit the receives. Every cost incurred must have some direct benefit to the sponsored program being charged, and charged proportionately with to that benefit.

In general, a cost is allocable to a particular sponsored program if it fulfills one of the following conditions:

• It is incurred solely to advance the work under the sponsored program or;
• It is necessary to the overall operation of the institution and is to be assignable in part to sponsored programs.

Unallowable Cost

Federal regulations describe the costs that are eligible for reimbursement under federal grants and contracts (allowable costs), and the costs that are not eligible for reimbursement (unallowable costs). Refer to Section J of OMB Circular A-21 for a list and explanation of allowable and unallowable costs.

Costs determined unallowable by EMU's Business & Finance Divisions are transferred to a discretionary fund if incurred on a grant fund. When the expenditure is funded by a grant or contract, the use of such funds is governed by the most restrictive rule, whether it is the federal regulation, program specific award condition, or University policy.