1. What Costs are Allocable
Allocation is the process of assigning a cost, or a group of costs, to one or more cost objectives. Costs may be allocated only if they advance the work of the project in the same proportion as the cost. For example, technical supplies are allocable if they benefit a project. In addition, costs must be supported by evidence of direct benefit to the project.
Costs should not be charged based on availability of funds. The availability of funds to pay an expense, or its inclusion in a budget is not evidence of the allocability of that expense. For instance, when a PI (Principal Investigator) wishes to charge an expense to a project, the RA (Research Administrator) may assist the PI in determining whether it will be used on only one project or on many projects, and therefore charge accordingly. If the expense is used on more than one project, determine what proportion of the expense benefits each project and charge accordingly.
A cost is allocable to a sponsored agreement if:
It is incurred solely to advance the work under the sponsored agreement.
It benefits both the sponsored agreement and other work of the institution, in proportions that can be approximated through use of reasonable methods.
It is necessary to the overall operation of the institution and, in light of the principles provided in the OMB Circulars and the Uniform Guidance, is deemed to be assignable in part to sponsored projects.
Criterion (1) above indicates the best approach to justify a cost on a specific sponsored agreement. Certain types of costs incurred for the benefit of a specific research agreement may easily be uniquely identified. Examples include approved pieces of equipment, animal costs, or chemicals purchased solely for one project.
Other costs may clearly be allowable and reasonable but a question arises: how best to allocate among one or more sponsored agreements that benefit from that cost? The most typical example of a cost that must be allocated among sponsored projects is general laboratory supplies. Federal Regulations acknowledges that it is sometimes impossible to precisely identify or allocate such costs; governing regulations thus allow for the exercise of judgment: "A precise assessment of factors that contribute to costs is not always feasible, nor is it expected. Reliance, therefore, is placed on estimates in which a high degree of tolerance is appropriate."
Non-administrative supplies purchased in bulk for multiple ongoing projects may not be distributed in an arbitrary manner, e.g., charged entirely to one project one month, and then entirely to another project the second month (unless that is the way that supplies were actually used).
2. When Allocating Charges, Ask:
- Is it reasonable?
- Is the method of allocating expenses between projects sound?
- Is it clearly documented?
When allocating costs, the PI working with the Research Administrators must ensure that the costs are reasonable and that costs allocated for more than one project have appropriate documentation. The allocation method must be reasonable and must relate to the costs being charged. The documentation must show that the allocation method reflects the PI's judgment and that each project benefits in the percentages or amounts indicated. The AGM 3.2.3 (Administrative Guide Memo) states that documentation must be in writing and should be updated frequently enough to ensure its accuracy. The allocation method must be documented in the project file or in the online transactions.
3. When Costs Have Overlapping Benefit
Sometimes costs may overlap because they benefit more than one project. In such cases, the PI and the Research Administrator should determine the allocation based on the proportional benefit each project receives. If the proportions are difficult to determine due to interrelationship of the work, then the costs may be charged “on any reasonable basis,” according to federal regulations. Documenting the method of allocation is crucial. The allocation method must be in writing and be current. It is important to have a proper method of allocation. If expenses have been charged based on a distribution method that is ultimately disallowed, those expenses may be disallowed for many months or even years, depending on how long that allocation methodology was used.
Basing an allocation of expenses solely on what was proposed and awarded in the budget will almost always be considered inadequate.
Federal Regulations allows that:
If a cost benefits two or more projects or activities in proportions that can be determined without undue effort or cost, the costs should be allocated to the projects based on the proportional benefit. If a cost benefits two or more projects or activities in proportions that cannot be determined because of the interrelationship of the work involved, then, notwithstanding subsection b, the costs may be allocated or transferred to benefited projects on any reasonable basis.
Any costs allocable to a particular sponsored agreement under the standards provided in this Circular may not be shifted to other sponsored agreements in order to meet deficiencies caused by overruns or other fund considerations, to avoid restrictions imposed by law or by terms of the sponsored agreement, or for other reasons of convenience.
4. Would You Accept These Charges?
Would You Accept These Charges?
- Example 1: Allocated chemical charges on the basis of comparative salaries?
- Example 2: Allocated expenses of a consultant 50-50 for the two projects that she supports?
- Example 3: Allocated lab supplies based on head count from 12 months ago?
The key to effective allocation methodology is to distribute the cost based on the benefit received. For example, should chemical charges be allocated on the basis of comparative salaries?
To answer this question, the PI and research administrator need to determine whether there was a direct relationship between someone’s salary and the amount of chemicals that person uses. In this case, there is no relationship; therefore, the allocation should not be based on that relationship.
In the second example, should the expenses of a consultant be allocated 50-50 for the two projects she supports? The question to ask is, does the consultant work on the two projects equally? Documentation, such as verification by the Principal Investigator, needs to support this determination. If the amount of time the consultant works on the projects changes, then the allocation must change also. In the final example, should costs for lab supplies be based on a head count from 12 months ago? The first question to ask is whether supplies are split equally among workers. The second question is whether the staffing remained consistent over the 12-month period. If the answer is yes for both questions, then the allocation methodology may be appropriate. If not, then another methodology for allocating the costs must be used.
Research administrators should update allocation methodologies whenever there is a change in benefit to the project. If nothing changes related to the methodology in six months, then nothing needs be changed. If circumstances change monthly, then the calculations might need to be redone monthly. Use good judgment to help make this type of determination. The key is that cost allocation must be supportable, understandable, and reasonable based on the benefit each project receives.
When you explain a method for allocating direct costs, keep the third-party/two-years-from-now rule in mind. Would a third party understand the explanation? Will the explanation be understandable two or more years from now?
5. Examples of Allocation Methodologies
Allocation is generally based on effort or usage:
Allocation Based on Effort
A research assistant spends 80% effort on Project A and 20% effort on Project B. The research assistant uses supplies totaling $3,000/month on the two projects. Usage is directly related to the amount of effort devoted to each project, therefore, $2,400 (80% of $3,000) is charged to Project A and $600 (20% of $3,000) is charged to Project B.
Allocation Based on Usage
The monthly cost of supplies/expendables to maintain a lab computer system is $1,000. The computer system is used solely for projects A and B. The computer operating system keeps a log of users and their time on the system. A reasonable base to allocate the expense would be computer user hours. Project A assistants have 100 combined user hours a month and project B assistants have 80 combined user hours a month. The cost allocated to project A is $560 (100 user hrs. /180 total user hrs. x $1,000). The cost allocated to project B would be $440 (80 user hrs. /180 total user’s hrs. x $1,000).
Allocation Based on Square Footage
A student is paid a salary of $1,500 a month to clean glassware in two laboratories that are conducting similar research. In this example, the square footage of the laboratories could be used as a reasonable basis. Lab A is 1600 square feet and Lab B is 1,200 square feet. Lab A is charged $855 (1,600-sq. ft/2800 sq. ft x $1,500) and Lab B charged $645 (1,200-sq. Ft/2800 sq. ft x $1,500).
6. Important Points about Allocation Methodologies
- Always remember to document why measures such as headcount, square footage or hours directly relate to the benefit received.
- Prohibited allocation methodologies include any methodology based on budgets, funding or available funds.
- Administrative expenses may not be distributed or rotated among sponsored projects. Pooled allocation methodologies may not be used to charge administrative costs to sponsored projects except by service centers with approved rates.
- Allocation methodologies must be documented and auditable. Documentation should include support for the specific costs allocated and indicate how the allocation methodology is logically related to the cost being allocated. This support should be retained by the department and made available for review.
- Allocation methodologies should be reviewed periodically to ensure they are reasonable.
- Methodologies based on sampling, surveys, etc. should be reviewed and updated at least once each fiscal year. Significant changes made to the population may signal the need to review the allocation methodology.
7. Expenditure Allocation PTAs
Expenditure Allocation PTAs are specialized accounts used to accommodate repetitive allocations of expenditures where the distribution of the expenditures to benefiting PTAs cannot be determined at the time the expenditure is incurred.
These conditions necessitate the creation of an expense allocation PTA. An expenditure allocation PTA distributes expenses such as materials, supplies, services, or salaries to the PTAs that benefit from the expenditure.