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.

When this last changed, and how you find out next time

The catalog described above is current as of 1 October 2024. It is not static: OMB revised 2 CFR 200 on 22 April 2024, published in the Federal Register at 89 FR 30046, and Subpart E’s cost-principles framework, including the selected-items-of-cost catalog, was carried through that revision.

OMB publishes every change to the Uniform Guidance in the Federal Register, and the Federal Register is one of the sources Regulatory Radar checks every day — so 2 CFR 200 is one of the few subjects where CASRAI reads the primary publication venue itself rather than waiting for somebody’s summary. It does not watch the NIH Guide, and it does not watch private accreditors.

Ask CASRAI whether a specific cost is unallowable under 2 CFR 200’s named-category catalog — it answers from an indexed corpus it re-checks daily and cites the passage it used, so you can open the source and check it. Two questions a day are free while you are signed out, no account and no card. Regulatory Radar is $29 a month for 150 a day, a subscriber dashboard, API keys and MCP access. Everything CASRAI publishes, including this page, stays free to read.

Frequently asked questions

A cost is reasonable, allocable, and well-documented, but it also falls into one of the 2 CFR 200.421-200.475 named categories — which test wins, and does correcting the allocability ever rescue a named-category cost?

The named-category test wins, and it is not rescuable by fixing allocability or documentation. The two routes described above are independent: the general 200.403 test asks whether a cost is reasonable, allocable, consistently treated, and adequately documented on its own facts, while the 200.421-200.475 catalog names specific cost types and states their allowability directly, “regardless of whether the institution treats the cost as direct or indirect” per 200.420. A cost can pass every element of the 200.403 test — genuinely reasonable, correctly allocated, perfectly documented — and still be unallowable outright because it falls into a category like alcoholic beverages (200.423) or lobbying (200.450) that the catalog bars by name. Better paperwork fixes an allocability problem; it does not fix a named-category problem.

If a cost type is not named in the 200.421-200.475 catalog, is it automatically allowable?

No. Per 2 CFR 200.420, the catalog’s omission of a particular cost item does not imply the item is either allowable or unallowable by default. An unlisted cost still has to independently clear the general 200.403 allowability test, and it is evaluated by analogy to similar named items in the catalog rather than treated as a gap the regulation left open on purpose.

Are entertainment costs ever allowable on a federal award?

Only narrowly. 200.438 makes entertainment costs unallowable except where a specific cost has a clear programmatic purpose and either prior written agency approval or explicit budget authorization for that purpose. The exception is tied to the specific cost and its documented programmatic justification — it is not a blanket allowance for entertainment spending that an institution can apply broadly once one instance has been approved.

Do unallowable costs only need to be kept off direct charges to the award?

No — they have to be excluded from the cost base used to calculate the institution’s indirect cost rate as well, not merely kept off direct-charge invoices. An unallowable cost that never touches a federal award directly but sits inside the indirect cost pool still inflates the rate charged to every award drawing on that pool, which is exactly why federal agencies scope “allowable costs / cost principles” as one of the compliance requirement types most consistently tested in a Single Audit — it is comparatively easy to test against source documentation like an invoice or receipt.

Is a cost that is merely expensive or discretionary the same as an unallowable cost?

No, and conflating the two is a common misreading. A conference registration fee that is reasonable, properly documented, and directly tied to disseminating the funded project’s results is an allowable direct cost — it simply has to independently clear the general 200.403 test like any other charge, the same as a cheaper expense would. “Unallowable” names a specific regulatory failure — either the 200.403 test or a 200.421-200.475 named category — not a size or discretion judgment about the expense.

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.