Section 6: Cost Principles and Budget Preparation Activities


6.1 Overview of Cost Principles

As a recipient of federal grant dollars, UT Austin is required to comply with the terms and conditions of the awards, as well as with any applicable federal laws, regulations, and cost principles. The Office of Management and Budget (OMB) issues a set of federal cost principles called Circular A-21 "Cost Principles for Educational Institutions" (05/10/2004) for determining costs applicable to grants, contracts, cooperative and other agreements with educational institutions and which are designed to provide that the Federal Government bear its fair share of total costs, determined in accordance with generally accepted accounting principles, except where restricted or prohibited by law. Thus, determining whether or not a cost incurred by institutions of higher education is allowed to be reimbursed by federal awards (i.e., allowability) is determined in accordance with the provisions of OMB Circular A-21.

In addition, OMB Circular A-110, "Uniform Administrative Requirements for Grants and Other Agreements with Institutions of Higher Education, Hospitals and Other Non-Profit Organizations" (11/19/1993) (further amended 09/30/1999, Relocated to 2 CFR, Part 215 (32 pages, 243 kb)) sets forth standards for obtaining consistency and uniformity among Federal agencies in the administration of grants to and agreements with institutions of higher education (i.e., the process of documenting and assigning/allocating costs).

You will probably find it very useful to review these applicable OMB Cost Principles circulars for more complete information and further guidance on allowable and allocable costs for grant awards and related sub-awards. These are available electronically on the OMB Circulars Web site.

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6.2 Allowable Costs vs. Allocable Costs

6.2.1 Allowable Costs

All costs charged to grants awarded by federal sponsors must be allowable costs. In general, for a cost to be allowable under a grant award, the cost must be: (1) directly related to and necessary to carry out the approved activities, (2) reasonable, (3) allocable to sponsored agreements under the principles and methods provided in OMB Circulars, i.e., costs must be given consistent treatment through the application of those generally accepted accounting principles appropriate to the circumstances, and (4) not specifically disallowed by the State or local laws or regulations i.e., they must conform to any limitations or exclusions set forth in these principles or in the sponsored agreement as to types or amounts of cost items.

Examples of allowable costs for awards (and subawards) include, but are not limited to: salaries and wages, fringe benefits, consultant fees, travel costs, equipment, supplies and materials, and Facilities & Administrative costs (i.e., indirect costs).

Allowable costs are defined and discussed in full in OMB Circular A-21. It is the definitive document regarding allowable costs.

Departmental Research Administrators (DRAs) should familiarize themselves with the limits on allowable costs for grant funds, and should be aware of the explicit restrictions set out in the OMB Circulars. You should also make sub-grant recipients aware of the limitations on allowable costs for grant funds.

6.2.2 Allocable Costs

Allocation refers to the process of assigning a cost, or a group of costs, to one or more cost objectives in a manner that can be equitably distributed based on the relative benefits received. In this case, a cost objective is the sponsored agreement, contract grant or other activity for which cost data (the cost of processes, products, jobs, capitalized projects, etc.) is needed.

Costs are allocable to a particular federal award if the goods or services involved are necessary and reasonable to advance the work, if they conform to any limitations or exclusion in the award, i.e., (are allowable), and if they are given consistent treatment through the application of generally accepted accounting principles appropriate to the circumstances.

Allocable costs are defined and discussed in full in OMB Circular A-110. It is the definitive document regarding allocable costs.

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6.3 Direct Costs vs. Facilities and Administrative (F&A) Costs

6.3.1 Direct Costs

Budget items such as salaries and wages, fringe benefits, consultant fees, travel costs, equipment, supplies and materials and other that are directly related to and necessary to carry out the approved research activities are called direct costs. Usually these types of direct costs are allowable and allocable under and OMB Circular A-21 and OMB Circular A-110.

6.3.2 F&A Costs, or Indirect Costs

Facilities and Administrative (F&A) costs are sometimes called indirect costs (IDC) or overhead costs and refer to those costs incurred by the university in support of the project that are not easily allocable as direct costs. These costs are usually associated with facility operation and maintenance, utilities and building and equipment depreciation, etc. and most sponsors recognize that universities incur these costs in addition to those direct costs that are directly allocable and included in a project's budget. F&A costs that are reasonable, can be equitably distributed based on the relative benefits received, i.e., allocable, and not prohibited by law or regulation are allowable under OMB Circular A-21.

The portion of F&A costs identified with organized research is distributed (allocated) by applying a negotiated F&A cost rate(s) to most budget items. This process allows the university to recover some portion of the costs associated with conducting research activities.

F&A cost rates are negotiated between the University and the Department of Health and Human Services (DHHS) and are reviewed periodically and outlined in a legally binding agreement. The agreement is institution-specific, breaks down the research related components and the applicable rate(s), and describes how special items are to be treated i.e. fringe benefits. The agreement also specifies the F&A rate to be applied when the PI or other research staff conducts their research away from the main campus for a specified period of time, i.e., off campus. For example, off campus F&A rates are applicable when research is conducted off campus for a period of no less than one long semester or all three summer months. Costs which are incurred in the field generally qualify for the off campus F&A rate. It is not uncommon for a proposed budget to include both on and off campus budget items. Please note: There are very few direct budget categories which are exempt from the application of F&A costs. The current federally negotiated F&A rate agreement for UT Austin is dated June 3, 2010 and applies to the period 9/1/08 - 8/31/10, until otherwise amended.

6.3.3 Reduced or Waived F&A Cost Rates

Facilities and Administrative (F&A) costs are real costs and must be included in your budget using UT Austin's federally-negotiated rates and will only be waived or reduced in rare and justified situations and dependent upon the sponsor type. In general the following guidelines exist:

Waivers or reduction of F&A rates beyond those outlined above are subject to administrative approval and must be requested by writing to the Director of the Office of Sponsored Projects. For more information contact the Office of Sponsored Projects, (512) 471-6424.

For additional information, see OSP's F&A rate memo. Since these federally-negotiated F&A cost rates are subject to change periodically, PIs should be prepared to make adjustments in their budgets. See the OSP Handbook for more information.

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6.4 Cost Sharing

Some sponsors require UT Austin to provide matching funds (or cost-sharing) as a condition of obtaining an award. Cost sharing can be a cash contribution or a donation of in-kind services, such as contributed time and effort by the PI and research group members. Sometimes UT Austin decides to make a voluntary cost sharing commitment.

The university's policy is to provide cost sharing only when required by sponsor agency guidelines or delineated in specific program announcements or when necessary due to the competitive nature of the RFP. These types of commitments should be held to a minimum as they have a significant financial impact on the department providing the funds and on the university as a whole.

All matching funds or cost sharing commitments based on the faculty member's academic time and effort must be approved in advance by the faculty member's department chair and dean when the cumulative total of such commitments exceeds the percentage of the faculty member's academic year time allowed by the College as a research allocation. If the commitment does not exceed a faculty member's research allocation, then only the Principal Investigator's signature is required on the Cost Sharing Recap Form.

Federal regulations require that cost sharing be allocable to a specific project and that it be verifiable, therefore, OSP collects and tracks data pertaining to grant-related cost sharing. The amount of cost sharing must be documented on the Cost Sharing Recap Form which should be attached to the proposal application. Go here for additional information from OSP on cost sharing.

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6.5 Budget Types: Detailed vs. Modular

Some sponsors require PIs to submit detailed budget category information with their proposal applications to assure that adequate resources are being requested for the proposed research activity.

Other sponsors, most notably NIH, do not require as much budget detail at the time a proposal is submitted and allow the use of a "modular" budget for some proposals. Modular budgets simplify the budget request by requiring less information than standard budgets and by allowing a PI to request funds in $25,000 modules. The PI determines the number of modules that will be needed to fund the project each year, and then totals the number of modules to determine the project budget. Modular budgets are used when requesting $250,000 or less during each year of the proposed study.

The information in the NIH SF424 (R&R) Application Guide provides a good explanation of budget category items, and is recommended reading regardless of the sponsor to which you will be submitting your proposal. To determine which budget component (detailed or modular) to use for NIH and other government proposal applications, read and consult the specific funding opportunity announcement because in general, budget formats will be provided in the RFP. If you are submitting an application to a private foundation, check the Website or talk to a program officer to discuss budget requirements.

Although OSP or the sponsor may not require a detailed budget in your proposal application, many researchers find it useful to first create a detailed budget on which they base their proposal application's modular budget.

Template 6.5 is a sample of a departmental budget worksheet that can be adapted and used to guide you in creating your budget detail spreadsheet. If you use the sample provided, modify it to suit your specific needs by adjusting the formulas in the worksheet to accurately calculate your totals. Create a budget for each year of the proposed project and add the annual totals to calculate the budget for the entire project.

For information on selecting the appropriate budget component and a detailed budget format, see the NIH Application Guide SF424 (R&R) — Adobe Forms Version A, Part I. Section 4.6-4.7.

For information on selecting the appropriate budget component and a modular budget format, see the NIH Application Guide SF424 (R&R) — Adobe Forms Version A, Part I. Section 5.4. More information can be found NIH modular grant application formats.

See Part II. C.2.g for NSF Budget information.

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