A Practical Guide to Cost Allocation for Grant-Funded Organizations

At a glance

• The main takeaway: The foundation of any cost allocation plan lies in accurately identifying which costs are direct (associated with specific programs) and which are indirect (shared across the organization). This is essential to stay compliant with the Uniform Guidance (2 CFR 200).
• What it means for nonprofits: Organizations have several options for allocating indirect costs depending on their size, capacity, and complexity: the de minimis rate, a negotiated indirect cost rate, or a reasonable documented method.
• Next steps: Document your cost allocation plan to assure your organization receives appropriate reimbursement for all expenses that benefit its programs. Aprio’s Nonprofit team is here to help you implement a formal, written cost allocation plan.

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The full story:

A cost allocation plan is a requirement for nonprofit organizations per the federal grant regulations. For instance, many organizations spend hours trying to determine how to allocate even a small amount of costs. While tools like ChatGPT and Copilot can assist with calculations, there is no shortcut to creating a cost allocation plan that genuinely fits your organization’s structure and needs.

The good news is that it doesn’t have to be overwhelming. By concentrating on a few key questions, you can develop or revise a plan that is both compliant and practical. Here are some important considerations to help you get started:

Direct versus indirect costs

The first step in figuring out a plan that makes the most sense for your organization is determining what your direct versus indirect costs are. The Uniform Guidance regulations (2 CFR 200) provide guidance in determining whether a cost is direct or indirect. However, there are specific program regulations that may offer further guidance.

Indirect costs typically benefit all programs at the organization, such as the salaries of the executive director or financial officer and overhead expenses for the fiscal department. On the other hand, direct costs are tied to a specific program or activity, such as a program director’s salary, program participant payments, or supplies purchased solely for a particular program.

Method of allocation

The Uniform Guidance (2 CFR Part 200) outlines several options for allocating shared administrative (indirect) costs to federal programs that benefit from those costs:

• De Minimis Rate: Organizations can elect to use the de minimis rate. Formerly 10% of modified total direct costs, now up to 15%. This is the most straightforward and least burdensome option, making it ideal for smaller organizations with limited capacity.
• Negotiated Indirect Cost Rate: Organizations can negotiate a rate with their cognizant agency. This method requires an annual reconciliation (“true-up”) after the fiscal year end, and it’s a popular option. However, many organizations find the calculation complex, which limits adoption.
• Other: If an organization has not elected the de minimis rate or negotiated a rate, it may allocate shared administrative costs using a reasonable, documented method based on benefit. This is typically the most time-consuming approach and is considered the default if neither of the other two options is chosen.

Cost allocation plan

Once your organization has selected a cost allocation method, document it in a formal Cost Allocation Plan. All grant-funded agencies are required to maintain a written plan that explains how indirect costs are allocated to federal programs. It should describe the allocation method, including supporting calculations, and outline any relevant time study procedures and allocation percentages for programs or departments.

The bottom line

Cost allocation takes administrative time, but it plays a critical role in ensuring organizations receive appropriate reimbursement for all expenses their programs benefit from. If you have any questions about implementing any of the above methods, your Aprio Nonprofit team is ready to help in creating a cost allocation plan for your nonprofit organization.