Unallowable Cost (2 CFR 200)

Under the federal Uniform Guidance at 2 CFR 200, an unallowable cost is an expense that a recipient institution is barred from charging to a federal grant or cooperative agreement — either as a direct cost on the award itself or indirectly, through the institution’s negotiated indirect (F&A) cost rate. Subpart E, the cost-principles portion of the Uniform Guidance, is the source of both routes by which a cost ends up unallowable, and research administrators run into real confusion when the two get conflated.

Two distinct ways a cost becomes unallowable

The first route is the general allowability test at 2 CFR 200.403: a cost has to be necessary and reasonable for the award, allocable to it under 200.405, treated consistently with how the institution handles like costs, compliant with GAAP and the award’s own terms, not claimed elsewhere as cost sharing, and adequately documented. A cost that fails any one of those criteria on its own facts is unallowable for that reason — but that failure is specific to the circumstances of the charge, not a blanket rule about the type of cost.

The second, distinct route is the “selected items of cost” catalog at 200.421-200.475, which names specific categories of cost and states their allowability directly, independent of whether a given instance would otherwise pass the general test. Per 2 CFR 200.420, this catalog applies regardless of whether the institution treats the cost as direct or indirect, and its omission of any particular cost item does not imply the item is either allowable or unallowable by default — an unlisted cost still has to clear 200.403 and is evaluated by analogy to similar named items.

Categories the catalog names as unallowable (or unallowable with narrow exceptions)

• Alcoholic beverages (200.423) — unallowable, with no general exception.
• Entertainment costs (200.438) — unallowable except where a specific cost has a clear programmatic purpose and prior written agency approval or explicit budget authorization.
• Lobbying costs (200.450) — unallowable, tracking the separate statutory restrictions in the Byrd Anti-Lobbying Amendment.
• Fines, penalties, damages, and settlements (200.441) — unallowable except where incurred complying with specific award terms or with prior agency approval.
• Bad debts (200.426) — unallowable, including related collection costs and legal fees.
• Contributions and donations (200.434) — unallowable as a cost to the recipient.
• Fund-raising costs (200.442) — generally unallowable, with a narrow exception for investment counsel costs tied to funds that include federal participation.

A smaller set of named categories are allowable but only within defined limits rather than barred outright — advertising and public relations (200.421) is allowable for recruitment, procurement, and required program outreach, but not for promoting the institution itself; memberships (200.454) is allowable for professional/technical organizations but not civic or social clubs. These are worth distinguishing from the categories above precisely because they are conditionally allowable, not unallowable by name.

Why the distinction matters operationally

A cost that fails allocability or reasonableness under 200.403/200.405 can often be fixed — moved to the correct award, better documented, or reduced to a reasonable amount. A cost in one of the specifically-unallowable categories above generally cannot be fixed by better paperwork; the category itself is barred regardless of how well-justified or well-documented the individual expense is. Institutions are required to identify unallowable costs proactively and exclude them from any proposal, invoice, financial report, or indirect cost rate proposal submitted to the federal government — unallowable costs must also be excluded from the cost base used to calculate the indirect cost rate itself, not merely from direct charges. “Allowable costs / cost principles” is one of the compliance requirement types federal agencies most consistently select when scoping a Single Audit, because it is comparatively easy for an auditor to test against source documentation such as an invoice or receipt.

For the fuller walkthrough of Subpart E’s general allowability framework, direct-vs-indirect cost distinction, and the rest of the selected-items catalog, see CASRAI’s guide to 2 CFR 200 Subpart E: The Cost Principles Governing Federal Grant Costs. For the specific three-condition test that determines whether an otherwise-allowable cost is properly assigned to a given award, see allocability.