Office of the Provost

Cost Principles and Requirements by Sponsor

Federal Sponsors

Cost Principles for Charging Direct and Indirect Costs / OMB Circular A-21
The US Office of Management and Budget (OMB) issued, in conjunction with college and University representatives, Federal Management Circular A-21, "Principles for Determining Costs Applicable to Grants, Contracts and Other Agreements (“OMB Circular A-21”) with Educational Institutions." This publication identifies allowable direct cost categories and prescribes a standard distribution and allocation method for the recovery of F&A (indirect) costs. Because OMB Circular A-21 also establishes standards for consistency in the treatment of costs for institutional accounting, the OMB Circular A-21 regulations apply to grants, contracts, and other award vehicles accepted by the University. Exceptions to the OMB Circular A-21 principles require the approval of the provost.

Pursuant to OMB Circular A-21, Section C, costs charged to federally sponsored programs must be reasonable, they must be allocable to the particular program charged, they must be allowable charges under applicable federal standards and they must be permitted under the terms of the specific award and charged in a consistent manner, in that similar costs incurred in like circumstances are treated in a similar manner. Following is a brief discussion of each of these concepts as they apply to sponsored programs.


According to OMB Circular A-21, a cost is “Reasonable” if the nature of the goods or services acquired or applied, and the amount involved therefore, reflect the action that a prudent person would have taken under the circumstances prevailing at the time the decision to incur the cost was made. In other words, the costs would be considered reasonable for the performance of the work by a prudent person taking the same circumstances into consideration.

Among the considerations in evaluating reasonableness are whether the cost is:

  • necessary for the operation of the institution;
  • necessary for the performance of an award; and
  • cost is consistent with institutional policies.


According to OMB Circular A-21, a cost is “Allocable” if the goods or services involved are chargeable or assignable to such cost objectives in accordance with relative benefits received or other equitable relationship. In more simple terms, Allocability means that:

  • Only expenses that specifically benefit a program can be charged to that program, or
  • If an expense benefits more than one program, it is to be allocated among the programs in proportion to the benefit each program receives, or
  • It is necessary to the overall operation of the institution and is deemed to be assignable in part to sponsored programs.

Consistent Treatment

Consistent treatment of costs is a basic cost accounting principle and is required by OMB Circular A-21 to assure that the same types of costs are not charged to federally sponsored programs both as direct costs and as indirect costs. According to OMB Circular A-21, a cost is “Consistent” if costs incurred for the same purpose, in like circumstances, are either direct costs only or F&A (indirect) costs only, but not both. 
A few examples: This means the institution should not tell the federal government that paper and photocopiers in the departments should be a part of the University F&A rate and then have a federal grant charge the cost of copy expense directly to a sponsored project unless it can document the requirements for the award or other circumstances are different than others normally performed at the University.

OMB A-21 states office supplies should be treated as F&A expenses but if a project involves printing many pages of a survey for test subjects, it is not a normal business practice so the cost can be justified. Normally computers are seen as ‘general purpose’ and should be within the F&A cost pool. But if the computer was going to be used primarily to record the results of a survey and run statistical analysis on the data, the purchase of the computer could be justified as a direct cost to the grant.

Allowable and Unallowable Costs

The costs charged to an award must be permitted (i.e., “Allowable”) under the terms and conditions of the award, SUU’s policies, and OMB Circular A-21 cost principles .  In this regard, it is important to recognize that the fact that a cost requested in a budget is awarded as requested, does not confirm a determination of allowability. For example, organizations are responsible for presenting costs consistently and must not include costs associated with their F&A rate as direct costs. A cost could also subsequently be determined to be unallowable because of the category of cost. Examples of budget items that are usually unallowable include: alcohol, entertainment, gifts, unusually high salary increases, and salary greater than any agency salary cap.