Cost Principles

Q. How is a direct cost defined in A-21?

A. A direct cost is one which can be identified specifically with a particular sponsored project or that can be directly assigned to such activities easily with a high degree of accuracy.​

Q. Is the direct cost allowable, allocable and reasonable?

A. To determine whether a cost meets the conditions of allowability, allocability and reasonableness, apply the “prudent person” test. If the answer to any of the following questions is no, the cost probably should not be charged to the project.

  • Is the cost necessary for the performance of the technical scope of the project?
  • Can the cost be identified specifically with the project or assigned relatively easily with a high degree of accuracy?
  • Would you be comfortable explaining to someone outside the university why you charged this item to your project? Would you be comfortable seeing this activity on the front page of your local newspaper?
  • Is the charging of this cost consistent with UC Merced’s policies, procedures, and practices?

The purpose of the direct charge to sponsored awards, not necessarily the type of charge, determines allowability. Costs that do not meet all these conditions might need to be charged to nonsponsored funds.​

Is the cost technical or administrative in nature?

​Technical costs: Costs that provide direct benefit to a sponsored project’s scientific or technical scope of work. Examples of common technical costs:

  • Salaries and benefits for faculty and research staff members, pre- and post-doctoral scholars, research technicians and lab assistants necessary to perform the technical scope of work
  • Lab supplies necessary for the research funded by the award (test tubes, reagents, etc.)

Technical costs may be charged directly to sponsored projects when they can be specifically identified to that particular project, provide technical benefits as described in the project’s scope of work, and will be used up entirely in support of that project.

Administrative costs: Costs that are incurred in relation to nontechnical support activities. Examples of common administrative costs:

  • Salaries and benefits for employees performing activities that do not support the technical scope of work
  • General office supplies, postage, local phone calls and other items of a generic administrative nature

Note: If a cost that would normally be considered administrative is being used for a project’s technical scope of work, it qualifies as a technical cost and can be charged directly to the sponsored award as long as it meets the necessary criteria for direct charges and is explicitly included and justified in the budget.

In general, all technical costs are allowable unless specifically disallowed and all administrative costs are unallowable unless specifically allowed. These costs must be given consistent treatment, meaning UC Merced must always treat the cost the same way (as a direct or indirect cost) under the same circumstances.​

Q. When are administrative costs allowable?

​A. For federal awards (including subawards with federal agencies as the prime awardee), OMB Circular A-21 requires that administrative expenses be treated as indirect costs under normal circumstances. They may be charged directly to federally sponsored agreements when all of the following criteria are met:

The expense is for the performance of tasks that are significantly greater than the routine level normally provided by the department and are in support of major activities or projects such as those described in OMB Circular A-21.

Some examples:

  • Large, complex programs such as general clinical research centers, primate centers, program projects, environmental research centers, engineering research centers, and other grants and contracts that entail assembling and managing teams of investigators from a number of institutions;
  • Projects that involve extensive data accumulation, analysis and entry, surveying, tabulation, cataloging, searching literature and reporting (such as epidemiological studies, clinical trials and retrospective clinical records studies);
  • Projects that require making travel and meeting arrangements for large numbers of participants, such as conferences and seminars;
  • Projects with a principal focus on the preparation and production of manuals and large reports, books and monographs (excluding routine progress and technical reports);
  • Projects that are geographically inaccessible to normal departmental administrative services, such as research vessels, radio astronomy projects, and other research field sites that are remote from campus; and
  • Individual projects requiring project-specific database management; individualized graphics or manuscript preparation; human or animal protocols; and multiple project-related investigator coordination and communications

These examples are not exhaustive nor are they intended to imply that direct charging of administrative or clerical salaries would always be appropriate for the situations illustrated. When charging administrative expenses directly, the PI must determine that the project meets the characteristics of a “major project” as defined by A-21; the sponsor has acknowledged that the project qualifies as such; and the costs incurred for the same purpose in like circumstances are consistently treated as direct costs for all activities.

Points to consider:

  • Can the administrative expense be identified specifically with a particular project or activity or assigned relatively easily with a high degree of accuracy?
  • Is the administrative expense explicitly listed and justified in the approved proposal budget?

For awards that do not require line-item budgets, specific justification must be included in the budget narrative and the project must be identified as major in accordance with A-21​

Q. What is the definition of an indirect cost?

​A. Indirect costs are those expenses that are incurred for common or joint objectives and therefore cannot be identified readily and specifically with a particular sponsored project. Examples of indirect costs are:

  • Salary for personnel engaged in a broad range of departmental support activities, including accounting staff and research administrators;
  • Utilities for a building housing multiple research projects among other activities;
  • General office supplies, postage, local telephone calls and communications infrastructure;
  • Depreciation on buildings and equipment;
  • Cost of library​