This instruction identifies specific items of costs that are either allowable or unallowable on sponsored accounts and specifies which allowable costs are treated as direct costs and which are treated as indirect costs. Exceptions to this Instruction must be approved in advance. Sponsored Program Services will coordinate requests for exceptions.

The guidelines for determining whether a cost is allowable or unallowable are presented in a document issued by the Office of Management and Budget (OMB) entitled, Circular A-21 Cost Principles for Educational Institutions”. The cost principles for determining whether an allowable cost is to be classified as a direct or indirect cost are also contained in this document. A-21 requires a consistent treatment of costs between direct and indirect costs and also between organized research, instruction and other institutional activities. In accomplishing this objective, the University is required to follow generally accepted accounting principles for educational institutions. OMB has incorporated four cost accounting standards of the Cost Accounting Standards Board into A-21.

The Cost Accounting Standards Board (CASB) has published four standards applicable to educational institutions. These standards deal with the allocability of costs to sponsored projects and other activities as either direct costs or indirect costs. The central principle of the standards is that costs incurred for the same purpose, in similar circumstances, must be treated consistently as either direct costs only or indirect costs only. This means that once a decision has been made to treat a particular cost as a direct cost, it cannot be included in the facilities and administrative rate if the cost has been incurred for essentially the same reason but funded from alternate funding sources (e.g., general funds). Likewise, if a decision has been made to recover a particular cost as an indirect cost, similar cost items may not be charged directly to sponsored programs unless the circumstances can be shown to be substantially different.

For a better understanding of the information contained in this instruction, the following definitions are given:

• Organized Research. All research activities that are separately budgeted and accounted for are classified as organized research. Organized research can be classified as either sponsored research or university research. Sponsored research means all research and development activities of the university that are sponsored (funded) by federal or non-federal agencies. University research means all research and development activities that are separately budgeted and accounted for by the university under a separate application of funds.
• Allowable Costs. This type of cost constitutes a proper charge to a particular activity, either as a direct or indirect cost. The cost must have either a direct or indirect benefit to the sponsored project. To be allowable, the cost must meet the test of reasonableness, be allocable to sponsored projects either as a direct or indirect cost, and not be specifically listed as an unallowable cost under federal regulations or the specific terms and conditions of the award. Further, to assure that sponsors are not charged twice for the same type of cost, costs incurred for the same purpose in similar circumstances must be treated consistently. This instruction distinguishes between allowable and unallowable costs.
• Unallowable Costs. This type of cost does not constitute a proper charge to a sponsored project, either as a direct or indirect cost. Any charge of this nature made to a sponsored project will be disallowed. Normally, this type of cost will not have a direct or indirect benefit to the sponsored project, but there are instances in which the Government fails to recognize the allowability of the cost even though there is a benefit to the sponsored project. This instruction describes the unallowable costs enumerated in Section J of OMB Circular A-21.
• In accordance with A-21 and the Cost Accounting Standards, costs which can be identified with only one project are allowable only on that project and may not be shifted to any others, i.e., they are not allocable to other projects. If funds are not available within the sponsored account to pay for the cost uniquely identified to that account, the cost should be identified as voluntary cost sharing and should be funded from other non-sponsored sources.
• Direct Costs. Direct costs are those costs incurred specifically for the benefit of a particular activity. Direct costs can be identified easily and accurately to an individual project. Typical transactions chargeable to sponsored projects as direct costs are the compensation of employees for the time or effort devoted to the performance of the work, including related staff benefit and pension plan costs; the cost of materials consumed or expended in the performance of the work; and, other items of expense incurred specifically for sponsored projects.
• Direct costs must be charged to the project for which the expenditure was incurred. The availability of funds within an account should not be the determining factor for funding an expenditure. Likewise, the offsetting of costs between projects (i.e., rotating supply purchases between projects) to simplify cost distribution is not a permissible practice. The cost benefit relationship between the item and the sponsored project must be demonstrated. To be allowable (i.e., in order to be charged to the sponsored account), the cost must be incurred within the approved project period and within limitations prescribed by the contract or grant award. In some instances awarding agencies may limit costs, for example the NIH salary cap. Where costs are limited by the sponsoring agency, but are incurred in support of the project, the costs should be captured as voluntary cost sharing.
• Indirect Costs. Indirect costs are those that have been incurred for common or joint objectives and are not readily subject to treatment as direct costs to sponsored research projects. Indirect costs at educational institutions normally are classified under the following functional categories: general administration and general expenses, sponsored projects administration expenses, operation and maintenance expenses, use allowance or depreciation for buildings and equipment, library expenses, student services expenses, and departmental administration expenses.
  • The sum of the costs applicable to the above categories for organized research is computed and divided by modified total direct costs of organized research to determine a facilities and administrative rate. Indirect costs are then distributed to sponsored research projects by applying this rate to the modified total direct costs charged to each project.
  • The Comptroller’s Office is responsible for the determination of the facilities and administrative rate applicable to organized research and the sponsored projects performed by Purdue University.

continued – Classification of Cost Items