Let’s Be Reasonable: Case Studies on Cost Allowability

Cost allowability is a core principle in the grants landscape. Because federal grants are awarded with taxpayer money, researchers and compliance agents become stewards of this money and have an obligation to use it responsibly. For this reason, there are multiple layers of checks involved in cost allowability, from pre-award to post-award.

The Uniform Guidance (2 CFR 200) outlines key cost principles in budgeting for and spending on federal grants. A cost must be “necessary” (§ 200.403), “allocable” (§200.405), “afforded consistent treatment” (§ 200.403), and “reasonable” (§200.404) in order to be considered allowable on a grant. For a cost to be necessary, it must be integral to the scope of work of the project. The cost must also be allocable, meaning that it must be charged in proportion to how the item is used for the project, especially in the case of shared equipment or space rentals. Items or services charged to a grant must be consistently treated by the institution as direct or indirect costs. Finally, a cost is reasonable if it “does not exceed an amount that a prudent person would incur under the circumstances” (§200.404).

But what does it look like in practice to be reasonable? This standard is particularly flexible and context-dependent. Some key guidelines for determining reasonable costs within your budget include aligning with industry standards and justifying an expense with scientific reason or precedent. When it is programmatically necessary to purchase a more expensive piece of equipment for technical reasons, previous work or studies can provide a precedent to guide you internally as you create your budget. Defining the market by establishing an average cost for the item or service, as well as comparing vendors at different price points, can help create a framework for reasonableness as well.

Let’s examine a few case studies to assess the reasonableness of different items in a pre-award budget.

Case Study #1

Dr. Pierre Moreau is a professor of Psychology, conducting a study assessing object permanence in children of various ages. He hopes to understand more about how children react when a toy is hidden from them, as well as where they first look for it. He finds a grant from the National Science Foundation that he hopes to apply for.

As he budgets for his proposal, he carefully considers what toys he will use during the study. A colleague suggests that all that is necessary is a small bouncy ball for $0.50 that can be hidden beneath a plastic cup. However, toys like this can pose a choking hazard to the age group that Pierre hopes to study. Additionally, Pierre has read in some prior studies that if a child is not engaged or excited by the toy, they may demonstrate indifference to it. This could invalidate the results of the data, which require the child to be invested in the toy’s whereabouts. For these reasons, Pierre chooses to budget for a more expensive toy for $16 with a bright pattern that crinkles upon touching it. These aspects, which appeal to sight, sound, and touch, are more likely to engage the child, which is critical for the validity of the research. He can justify this using prior studies as examples, so the upgraded toys can be considered a reasonable expense.

When it comes to equipment or other program-specific supplies, the programmatic justification is critical. What is reasonable for one study may be deemed unreasonable for another, simply based on the context: oftentimes, context understood primarily by the researcher.

Case Study #2

Dr. Amelia Jackson is a professor of environmental science seeking to budget for a statistician to analyze data collected in her fieldwork related to water quality. She reaches out to several individuals for quotes. Hubert, who has recently graduated from his Ph.D. program with limited experience in statistical consulting, would charge $100/hour for an estimated 40 hours. Jack, another colleague with much more experience, would charge $200/hour but estimates that the work will only take him 30 hours. Finally, Patricia, a statistical consultant by trade, would charge $450/hour and estimates that the work will take her 20 hours.

Amelia has the best relationship with Jack, whom she’s known since graduate school. She knows that he will be communicative and professional in his work, although he would charge more than Hubert. Patricia was recommended to her from a colleague at another institution, but the rate seemed far above the typical market value for a statistician for this type of work. Additionally, although Patricia’s estimate of the hours was lower than the other two, Amelia would be taking on a significant financial risk if the work took the 30 or 40 hours that Jack and Hubert had predicted. She decided that hiring Patricia would be unreasonable.

After completing the rest of her budget, Amelia realized that she had a little bit over $5,000 left to fill the consulting role before reaching the proposal’s budget limit. She trusted the quality of Jack’s more so than Hubert’s, and his rate would be within her budget if she could negotiate it down a little bit. She asked Jack if he would consider lowering his rate to $175/hour, and he agreed. Amelia marked the budget accordingly.

Assessing the market value of a skill or an item can help whittle down the possible options. Having adequate documentation from professionals in the field about their usual rates and experience level can provide additional insight into what is standard for any given service. A certain number of quotes may also be required by procurement at the time of hiring, depending on the price threshold. Finally, the budget itself may put constraints on the price thresholds that make sense for any given item or service when there are multiple reasonable options available.

Overall, reasonableness is extremely context-dependent on the project needs and current market. This is why allowability does not stop at the pre-award stage. When a federal agency awards a grant and approves the budget, that agency is essentially deeming the budget reasonable. By the time of award, though, prices may have changed, warranting some adjustment of expenses. With any budget revision, departmental and central sponsored programs administrators can help guide investigators on staying in line with the financial terms of the grant. Some sponsors may not require prior approval for budget changes, but the institution can still be at risk of audit findings or non-payment for expenses that are deemed unallowable. Following the principles of reasonable, allocable, and necessary expenditures minimizes risk for both the investigator and the institution.

By: Samantha Tassillo