Home / Resources / 2 CFR 200.403 explained
Updated August 2026
Before a cost can be charged to a federal grant it has to clear a short list of tests. Most of them are obvious. Two of them are where small nonprofits get findings.
§200.403 is the gate every cost passes through. Necessary and reasonable, allocable, consistently treated, within the award's limits, documented, and not already paid for by another federal award. Fail any one and the cost is unallowable, however sensible it seemed.
Would a prudent person in your position have incurred it, at that price, for this award? Allocable is a separate idea and gets its own section at §200.405.
Cost principles exclude some cost types outright. Your award's terms can exclude more, or cap them.
The same rule for federally funded and non-federally funded activity. A mileage rate that is generous only on the grant fails here.
A cost incurred for the same purpose in like circumstances cannot be a direct cost on one award and sit in your indirect pool on another. This is the one that catches people.
With carve-outs for state and local governments and Indian Tribes.
In this period or a prior one. That is the cost-sharing rule at §200.306.
The second one that catches people. A real cost with no record behind it is an unallowable cost.
Administrative closeout costs may be incurred through the final report due date and must be liquidated by then, charged to the final budget period unless the agency says otherwise. Closeout itself is §200.344.
Consistent treatment. If your executive director's time is a direct charge on the federal award but sits in overhead everywhere else, you are charging twice for the same kind of cost. The fix is a written cost allocation policy that says which costs are direct and which are indirect, applied to everything.
Documentation. Auditors do not disallow costs because they think you did not incur them. They disallow them because you cannot show it. Payroll charged by memory rather than by a certified time record is the classic version, and it lives at §200.430.
One page naming which cost types are direct and which are indirect, applied to every funding source. It answers test four permanently.
Receipt, invoice, approval, and which award it hits. Reconstructing a year later is where costs get disallowed.
Awards routinely restrict costs the Uniform Guidance would allow.
This is general information, not legal or accounting advice. Federal grant rules change and are applied differently by different agencies and auditors. Check with your auditor, your grant officer, or an attorney before relying on any of it.
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Under 2 CFR 200.403 a cost must be necessary and reasonable for the award and allocable to it, conform to any limits in the cost principles or the award, follow policies applied uniformly to federal and non-federal work, be treated consistently as direct or indirect, accord with GAAP, not be used as cost sharing on another federal award, and be adequately documented.
A cost is reasonable if a prudent person would have incurred it under the circumstances prevailing when the decision was made. It is a judgement about both the decision to spend and the amount spent, not a fixed dollar test.
No. 2 CFR 200.403 requires consistent treatment: a cost incurred for the same purpose in like circumstances must be treated either as a direct cost or as an indirect cost, not both. A written cost allocation policy applied to all funding sources is how organizations satisfy this.
It is treated as unallowable. 2 CFR 200.403 lists adequate documentation as a condition of allowability, so a cost that was genuinely incurred but cannot be evidenced can still be questioned and disallowed at audit.
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Sources: 2 CFR Part 200 (eCFR), read 29 August 2026. Federal grant rules change; check the current text before relying on this.