78. Introduction to Federal Cost Principles
By the end you'll be able to
- Locate 2 CFR Part 200 and identify the subparts that govern federal cost decisions.
- Name the three tests (allowable, allocable, reasonable) every federal cost must pass.
- Explain why agency budget templates are not the source of truth for federal cost rules.
- Use the regulation as a reference text rather than guessing from precedent.
Federal grant budgets are not free-form spreadsheets. They are governed by 2 CFR Part 200, the Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards. In this lesson you map the regulatory architecture so you understand why every cost in a federal budget must clear three tests (allowable, allocable, reasonable) before it can be charged. Skip the architecture and you write budgets that look fine on paper but trigger findings the moment an auditor opens the file.
You will see that Subparts A through F of Part 200 sit underneath every federal proposal, regardless of agency. The cost principles in Subpart E are the working text you will return to for the rest of your career: they define what counts as a direct cost, what counts as indirect, which categories are unallowable on their face, and what documentation a recipient must maintain. Agencies layer their own terms on top, but the floor is uniform across the executive branch.
By the end you should be able to tell a program officer or a finance director that 2 CFR 200 is the source of truth, not the funder's narrative budget template, and you should know exactly where in the regulation to look when a cost is in dispute. That orientation is what separates a confident federal budget writer from one who is guessing.
Common mistakes
These are the traps learners hit most often on this topic. Knowing them in advance is half the fix.
Treating the budget template as the rulebook.
Templates capture format and category structure. They do not capture allowability rules. Building a budget from a template without reading 2 CFR 200 is how unallowable costs end up looking compliant.
Confusing agency guidance with the Uniform Guidance.
Agencies layer their own terms on top of 2 CFR 200, and those terms can be more restrictive but never less. Reading only the agency notice without the underlying regulation creates blind spots that surface at audit.
Practice problems
Try each on paper first. Click Show solution only after you've made a real attempt.
- Problem 1Draft a 90-second briefing for a new program manager explaining where to look up federal cost rules and what to do when a cost is in dispute.
Show solution
Start at eCFR.gov, Title 2, Part 200, Subpart E for cost principles. Every cost has to pass three tests in sequence: is it allowable under the regulation and the program terms, is it allocable to this specific award, and is the amount reasonable. When in doubt, document the decision rationale at the time of the decision and bring the question to the cognizant federal agency before charging the cost, not after.
Practice quiz
- Question 1Which document is the primary source of truth for federal cost principles on a grant award?
- Question 2A cost must clear three independent tests to be charged to a federal award. Which set names them correctly?
- Reflection 3In one or two sentences, explain why a finance director should not rely solely on the funder's budget template to determine what is allowable.
Lesson 78 recap
2 CFR Part 200 is the government-wide source of truth for federal cost principles. Every cost must independently pass the allowable, allocable, and reasonable tests before it can be charged to an award.
Coming next: Lesson 79 — The "Prudent Person" Test
Next we focus on the reasonableness pillar through the lens federal auditors actually apply: the prudent person test.
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