What makes a grant cost allowable
Seven tests decide if a cost survives an audit. The two auditors argue (reasonable, allocable) and the one most costs fail: being documented.
LAST REVIEWED 29 AUGUST 2026
“Allowable” is the word that decides whether a cost survives an audit. A charge is not allowable simply because you paid for it with grant money and it seemed reasonable at the time. It has to pass a specific set of tests, and failing any one of them can turn a perfectly sensible expense into a disallowed cost you have to give back.
The seven tests
2 CFR 200.403 lays out the factors that make a cost allowable. To be charged to a Federal award, a cost must:
- be necessary and reasonable for the performance of the award, and allocable to it;
- conform to any limitations or exclusions in the cost principles or the award;
- be consistent with policies that apply uniformly to your federally financed and other activities;
- be given consistent treatment — a cost charged as direct here cannot be one that, for the same purpose in like circumstances, you also recover as indirect;
- be determined in accordance with GAAP;
- not be used as a cost or to meet the cost-sharing requirement of another federally financed program, in this period or a prior one;
- be adequately documented.
The two that get argued: reasonable and allocable
Most of the tests are yes/no. Two are judgement calls, and they are where auditors spend their time. Reasonable means what a prudent person would have paid under the circumstances — defensible, not extravagant, the kind of decision you would be comfortable explaining. Allocable means the award actually benefits from the cost in proportion to what you charge it: if a laptop is used half on this grant and half on other work, charging the whole thing to the grant is an allocability problem, not a reasonableness one.
Where it bites in practice
Allowability is not a one-time check at purchase; it is what an audit reconstructs afterwards, line by line, often years later. That is why the documentation and the audit trail matter as much as the spending decision itself — the question is rarely “was this a good use of the money” and almost always “can you show, now, that it met all seven tests then”. Keeping the source and the reasoning attached to each charge, at the time, is the difference between a five-minute answer and a finding.
This guide is general information about how grant compliance work is commonly organised, not legal, audit or accounting advice. Grant rules change, and terms vary by funder and award — always check your own award documents and the current regulation, and talk to your auditor about your specific circumstances.
Primary sources
- 2 CFR 200.403 — Factors affecting allowability of costs — The seven factors a cost must meet to be allowable under a Federal award.
- 2 CFR 200.404 — Reasonable costs — What “reasonable” means — the prudent-person standard and the factors behind it.
- 2 CFR 200.405 — Allocable costs — What “allocable” means — charging a cost in proportion to the benefit the award receives.
This guide is general information about how grant compliance work is commonly organised, not legal, audit or accounting advice. Grant rules change, and terms vary by funder and award — always check your own award documents and the current regulation, and talk to your auditor about your specific circumstances.