What is allowable cost?
Allowable costs are expenses charged to a sponsor and recognized as a fundamental part of a contract between two entities. Often used for reimbursement for services performed on behalf of the government, allowable costs are usually specified in the contract or as part of the laws regulating the respective government body.
Allowable costs are usually present in a contracted product or service between two parties. These costs are determined by specific federal principles and sponsor guidelines, called reasonableness and allocability:
- Reasonable costs must form a fundamental part of the contract and must be in compliance with both state and federal laws. They must reflect the amount the average person would pay or expect to pay under the same circumstances. Reasonable costs should also be in line with ethical business practices and possess some degree of consistency.
- Allocability determines whether costs can be charged to federal awards, such as a grant. Such a cost must be incurred only as work that was performed under that federal award or as a closely related project and is limited by the size of the award. Like the reasonableness principle, allocable costs must be consistent.
Unallowable costs are those not covered in the contract or the organization’s rules and regulations. These will often be distinguished from allowable costs as an extension of the regulations governing them; unallowable costs can also be assumed from the limitations placed on allowable costs, such as spending more money than allocated for an expense.
Even costs made on a credit card may be allowable costs. Get the best hotel credit card to get your accommodations expenses reimbursed.
Allowable cost example
Examples of allowable costs include salaries and related expenses of technical staff, costs charged on long distance phone calls, justified computer costs, travel expenses, medical expenses and any form of publication fees.
A company has been hired by the government to do work in a particular city. In the contract, the government states that the company can make allowable-cost dining expenses, but explicitly states that these must remain reasonable. For the first night, the company’s employees enjoy a modestly priced dinner, which is an allowable cost. However, the next night they eat at a fancy lobster restaurant, which the government determines is an unallowable cost.