2 CFR 200.404 Reasonable Costs: 5-Factor Test

Full answer: 2 CFR 200.404 uses 5 checks to decide whether a federal award cost is reasonable: ordinary and necessary purpose, legal and award restraints, comparable local market prices, prudent conduct, and consistency with written policies. The rule has no universal dollar cap. If one check is unresolved, pause the charge and document the missing price, purpose, policy, or approval evidence before spending.

This guide is for grants managers, finance teams, procurement reviewers, and project leads making a pre-charge decision. The strongest record answers each factor before a reviewer has to ask for it.

Data note: Source review by Grantsights completed September 13, 2026 against current 2 CFR 200.1, 2 CFR 200.403, 2 CFR 200.404, 2 CFR 200.405, and 2 CFR 200.407. The eCFR owns the government-wide baseline. The Notice of Award, agency procedure, and the recipient's written policies may add stricter controls.

It is a bad fit for deciding whether a project activity is inside the approved scope, interpreting a sponsor-specific restriction, or approving a budget revision without the Notice of Award and agency procedure.

Based on our review of the five factors, Grantsights maps each factor to a decision-file artifact and uses one stop condition: a familiar cost label never proves reasonableness by itself. For example, one research team may support a $14,000 server when the award needs its documented computing capacity and the price is supported, while the same server is a weak charge when staff cannot show the technical need, comparison price, or policy route. That finding changes the next action from classifying the item to assembling a 5-factor decision record.

Is It a Supply or Equipment Under 2 CFR 200.1?

Under 2 CFR 200.1, a supply is tangible personal property other than equipment. Equipment must satisfy both parts of the federal definition: a useful life of more than one year and a per-unit acquisition cost that equals or exceeds the lesser of the recipient's capitalization level or $10,000. A computing device that does not meet that equipment cost test is a supply.

The phrase “lesser of” matters. If a recipient capitalizes equipment at $5,000, an item with a useful life over one year and a $7,000 acquisition cost can meet the equipment definition even though it costs less than $10,000. After classification, apply the allowability, allocability, reasonableness, consistency, award, and approval screens. Then apply the property standards in 2 CFR 200.313 for equipment or 2 CFR 200.314 for supplies.

Download the federal cost classification checklist (CSV) to record the definition test, five-factor evidence, award controls, and final decision in one file. The checklist is a documentation aid, not an approval or a substitute for the award and agency procedure.

Allowable Costs Under Federal Grants: The Complete 2 CFR 200 Guide

If you manage federal grant funds, cost allowability is the single concept that determines whether your spending survives an audit or becomes a questioned cost you have to repay. The rules live in 2 CFR Part 200, Subpart E, and they apply to every federal grant recipient, whether you're a university, nonprofit, state agency, or tribal organization.

This guide is for grants managers, finance teams, and project leaders who need a defensible pre-charge decision. It separates the federal baseline from the award-specific checks that decide the final answer.

Last updated: September 13, 2026

---

What 2 CFR 200.404 Doesn't Tell You About the Decision File

The official text names five factors, but it does not prescribe a form, quote count, approval memo, or dollar threshold. Grantsights uses a factor-to-evidence crosswalk: write one answer and attach one source for each factor that could be disputed. If a market comparison is unavailable, record why and identify the alternative evidence used. If a written policy conflicts with the proposed charge, stop rather than treating a fair price as approval.

This guide covers the pre-charge reasonableness and allowability decision. The federal grant budget guide covers proposal construction, the budget modification guide covers post-award changes, and the equipment management guide covers inventory and disposition after purchase. Use the grant database when the question is which current program fits, not whether an incurred cost is defensible.

The Pre-Charge Cost Screen: What the Cost Principles Do Not Decide

The federal cost principles do not create an automatic approval merely because a charge is reasonable or appears in the approved budget.

Case in point, illustrative: A project has funds left for a $14,000 server. The team should not decide from the equipment definition alone. It should confirm the server is necessary to the approved scope, check whether it was budgeted, determine the award's prior-approval route, and retain the procurement and allocation evidence before charging it.

Grantsights analysis of the current rule shows the practical route: when the file cannot show purpose, allocation, approval authority, written-policy fit, and price or rate support, pause the charge and resolve the missing evidence first.

Use the following four operational screens after checking every criterion in 2 CFR 200.403. These screens organize the decision; they are not a substitute for the regulation, award terms, or agency rules.

Test 1: Allowable

According to 2 CFR 200.403, the cost must meet every applicable criterion and the selected-item rule in Subpart E. It also can't be prohibited by the terms of your specific award, your agency's regulations, or the authorizing statute. A cost that's generally allowable under 2 CFR 200 can still be unallowable under your specific grant if the Notice of Award restricts it.

Test 2: Allocable (2 CFR 200.405)

According to 2 CFR 200.405, the cost must benefit the project it's charged to. If a cost benefits two grants, allocate it by proportional benefit when that can be determined without undue effort or cost. When the proportions can't be determined because the work is interrelated, the rule permits a reasonable documented basis. You can't charge a cost to whichever grant has money available just to overcome a funding shortfall or restriction.

A cost is allocable to a federal award if it:

• Is incurred specifically for the federal award
• Benefits both the federal award and other work, and can be distributed in proportions that may be approximated using reasonable methods
• Is necessary to the overall operation of the organization and is assignable in part to the federal award per the cost principles

Test 3: Reasonable (2 CFR 200.404)

Would a prudent person have paid this amount under the circumstances that existed when the decision was made? According to 2 CFR 200.404, the reviewer must consider all 5 named factors, including local market prices and deviation from established written policies. Use the factor table above instead of relying on a cost label or a fixed threshold.

The classic example: buying a $3,000 laptop for a graduate student doing data analysis is reasonable. Buying a $6,000 laptop for the same work probably isn't, unless you can demonstrate specific technical requirements (like GPU processing for machine learning) that justify the premium.

Test 4: Consistent (2 CFR 200.403)

You have to treat similar costs the same way regardless of the funding source. If you charge office supplies as a direct cost to your NIH grant, you can't include office supplies in your indirect cost pool for your NSF grant. If you give all employees a 3% raise and charge the increased salary to a federal grant, that's consistent. If you give one person a 15% raise and charge it to a grant, that needs justification.

Consistency also means you follow your own organization's policies. If your travel policy caps hotel costs at the GSA rate, you can't exceed that cap on a federal grant even if the grant has money available.

---

The Selected Items of Cost: What's Allowed, What's Banned

Sections 200.421 through 200.476 of 2 CFR 200 address selected cost categories. Here's what you need to know about the most important ones.

Start as Unallowable, Then Read the Exact Section

These categories are commonly unallowable, but several sections contain narrow exceptions or prior-approval paths. Read the cited section and the award before making the final decision.

The entertainment restriction catches a lot of people. Tickets, recreation, and social activities start as unallowable. A business agenda alone does not make a meal allowable. Confirm the programmatic purpose, award authorization, agency policy, and recipient policy before charging it. A celebration dinner does not meet that screen.

Allowable With Conditions

These costs are permitted, but you have to follow specific rules:

Compensation and Fringe Benefits (200.430-200.431): Compensation must meet the current federal rule, the award, and the recipient's written practices. NIH applies its current salary-cap policy to covered awards, so verify the fiscal-year notice and institutional base salary rules before charging compensation.

Travel (200.475): Travel may be allowable when it follows the recipient's written travel policy, serves the award, and meets the section's conditions. GSA per diem rates are a useful federal benchmark, but they do not replace the recipient's policy or award terms. Check the agency's international-travel and prior-approval rules before booking.

Equipment (200.439): Equipment has a useful life of more than one year and a per-unit acquisition cost that equals or exceeds the lesser of the recipient's capitalization level or $10,000. Allowability and prior approval depend on the award, approved budget, and agency terms. Tangible personal property that does not meet the equipment definition is a supply, but the supply label does not establish allowability.

Advertising and Public Relations (200.421): Allowable only for specific purposes: recruiting project personnel, procuring goods and services, disposing of surplus materials, and other activities specifically required by the award. General institutional advertising and public relations campaigns are unallowable.

Conferences and Meetings (200.432): Allowable when the primary purpose is disseminating technical information or results of the project. Costs include rental of facilities, speaker fees, and meals provided as part of the conference (not entertainment meals). Sponsoring or hosting a conference must serve the project objectives.

Memberships, Subscriptions, and Professional Activity (200.454): Memberships in professional and technical organizations are allowable. Memberships in civic, community, and social organizations are unallowable. Subscriptions to professional journals are allowable when related to the project.

Participant Support Costs (200.456): Stipends, travel allowances, and registration fees for participants, not employees, may be allowable for approved activities. These costs are excluded from the Modified Total Direct Cost base. Use the cost allocation guide for the base and documentation route, then confirm the award's rebudgeting and prior-approval terms before moving participant-support funds.

Subawards (200.331-200.332): Up to the first $50,000 of each subaward is included in the MTDC base for indirect-cost calculations. Amounts above that are excluded. Confirm the award's prior-approval terms before adding or materially changing a subaward.

Insurance and Indemnification (200.447): Insurance costs are allowable when required by the award or when it represents standard prudent business practice. Self-insurance programs are allowable under certain conditions.

Prior Approval Depends on the Cited Circumstance (200.407)

According to 2 CFR 200.407, the absence of prior written approval does not by itself make a cost unreasonable or nonallocable unless another cited section specifically requires approval for allowability. The section points readers to cost sharing, program income, budget and program-plan revisions, fixed-amount subawards, specified compensation and fringe-benefit cases, equipment and capital expenditures, exchange rates, settlements, fundraising, personal-use items, insurance, organization costs, pre-award costs, rearrangement, and travel.

Use the budget modification guide for scope and budget changes. For any cost, record the exact rule, award term, or agency procedure that creates the approval requirement and keep the approval with the charge.

---

How to Determine If a Cost Is Allowable: A Practical Decision Framework

When you're staring at a purchase request and wondering whether it's allowable, work through this checklist:

Step 1: Check the "selected items of cost" list. Sections 200.421-200.476 address named categories. If your cost matches one of them, apply that section. If it's not listed, 2 CFR 200.420 says to base the determination on similar or related items and the general cost principles.

Step 2: Check your Notice of Award. Your specific award may restrict costs that are otherwise allowable under 2 CFR 200. Some agencies add special conditions that limit travel, equipment purchases, or specific cost categories.

Step 3: Check the agency's grant policy guide. NIH has the NIH Grants Policy Statement. NSF has the Proposal & Award Policies & Procedures Guide. DOE, DOD, and other agencies have their own supplements. These may add restrictions or relax certain requirements.

Step 4: Check your organization's policies. Your own cost accounting policies, travel policies, and procurement procedures set limits that apply on top of the federal rules. If your institution caps hotel costs at $200/night, you can't exceed that just because the GSA rate for the city is higher.

Step 5: Apply the pre-charge screens. Even if the cost passes the selected-item rule, award terms, and agency guide, it still has to meet the 2 CFR 200.403 criteria and the reasonableness and allocability rules.

Step 6: Document your determination. Write down your reasoning. If an auditor asks why you charged this cost two years from now, your documentation is your defense.

---

Common Audit Findings Related to Unallowable Costs

The Federal Audit Clearinghouse publishes Single Audit submissions and findings. The patterns below are risk screens, not a claim that every auditor ranks the issues in the same order. Pair them with the Single Audit requirements guide before deciding whether a finding must be reported.

Finding 1: Costs Charged Without Adequate Documentation

A cost can be questioned when the file does not support its connection to the award. Missing payroll support, travel records without a business purpose, or purchases without a project justification leave the reviewer unable to verify allocability and reasonableness.

Finding 2: Effort Reporting Discrepancies

When someone's budgeted at 30% effort on a grant but their effort reports show 15%, auditors question the salary charges. The effort certification process exists specifically to verify that salary charges match actual work. Discrepancies between budgeted effort, actual effort, and certified effort are serious compliance findings.

Finding 3: Cost Shifting Between Grants

Moving costs from one grant to another to cover an overrun, or charging costs to whichever grant has the most remaining funds, is a compliance violation. Every cost transfer must be supported by documentation explaining why the original charge was incorrect and why the new project is the appropriate funding source. Transfers solely to cover overruns are explicitly unallowable.

Finding 4: Exceeding Budget Categories Without Approval

A category variance does not create one government-wide approval threshold. Compare the actual change with 2 CFR 200.308, the Notice of Award, and the agency's rebudgeting procedure. See the grant budget modification guide for the source-order decision.

Finding 5: Missing Prior Approvals

A cost can pass the reasonableness screen and still fail an approval condition in the award or a section cited by 2 CFR 200.407. Record the exact approval authority instead of assuming every unbudgeted item follows the same rule.

---

The Most Misunderstood Cost Categories

Food and Meals

Food costs on federal grants are a compliance minefield. Here's the breakdown:

• Working meals at project meetings: Do not assume a documented business purpose makes the meal allowable. Check the award, agency policy, recipient policy, and the entertainment and conference-cost rules.
• Conference meals: Check whether the cost is necessary for the conference, permitted by the award and policies, and separate from entertainment.
• Team lunches, celebration meals, social dinners: Treat these as entertainment unless the exact facts satisfy 2 CFR 200.438 and the award authorizes the programmatic purpose. A celebration alone is not enough.
• Light refreshments (coffee, water, snacks): This is a gray area. Some agencies allow it for working meetings; others don't. Check your agency's specific guidance.

Computers and Technology

A laptop costing $2,000 is classified as a supply under the federal equipment threshold, while a $15,000 server may meet the equipment definition when its useful life also exceeds one year. Classification does not prove allowability or approval. Apply the award, agency, procurement, and 2 CFR 200.404 screens to both.

Consultants

Consultant costs require a supported procurement and rate decision. 2 CFR 200.404 does not set a universal consultant hourly cap. Compare the rate with the relevant market, document the required expertise and scope, check conflicts and procurement rules, and retain the selection rationale.

---

The De Minimis Indirect Cost Rate

According to 2 CFR 200.414(f), an eligible recipient may elect a de minimis rate of up to 15% of Modified Total Direct Costs (MTDC). This maximum increased from 10% in the 2024 Uniform Guidance revisions.

What's included in MTDC: Salaries, fringe benefits, materials, supplies, services, travel, and the first $50,000 of each subaward. What's excluded: Equipment ($10,000+), capital expenditures, rental costs for space, tuition remission, scholarships, participant support costs, and the portion of subawards exceeding $50,000.

An eligible recipient may elect a rate up to 15% or negotiate an indirect cost rate. Once elected, the de minimis rate must be used consistently for all federal awards until the recipient chooses to negotiate a rate.

---

FAQ: Common Questions

What makes a cost reasonable under 2 CFR 200.404?

A cost is reasonable when it does not exceed what a prudent person would incur under the circumstances that existed when the decision was made. Review all 5 factors in 2 CFR 200.404: ordinary and necessary purpose, legal and award restraints, comparable local market prices, prudent conduct, and consistency with written policies.

What costs are always unallowable on federal grants?

Alcoholic beverages, bad debts, alumni activities, commencement costs, lobbying, and goods or services for personal use are among the categories that start as unallowable under Subpart E. Read the exact section before deciding because entertainment, fundraising, fines, settlements, and other categories may contain a narrow exception, authorization, or prior-approval rule.

Do I need prior approval before spending federal grant funds?

The award, agency regulations, and 2 CFR 200.407 determine whether prior written approval is required. Confirm the Notice of Award, approved budget, agency procedure, and any applicable condition before charging equipment, foreign travel, participant support, pre-award costs, or subaward changes. Do not rely on a generic dollar threshold or percentage trigger.

What happens if an auditor finds unallowable costs on my grant?

An auditor may report questioned costs and other findings when the applicable Single Audit criteria are met. The federal agency or pass-through entity makes the management decision and may request evidence, require corrective action, or determine that a refund with interest is due under 2 CFR 200.410. Review the Single Audit requirements guide and the exact finding before choosing a response.

Is equipment allowable on federal grants?

Equipment may be allowable when it serves the approved scope and the award permits the charge. Under 2 CFR 200.1, equipment has a useful life of more than one year and a per-unit acquisition cost that equals or exceeds the lesser of the recipient's capitalization level or $10,000. Tangible personal property that does not meet that definition is a supply. Confirm the award's budget, approval, property-management, and disposition terms before purchase or transfer.

---

Sources

• 2 CFR 200.1 - Definitions (eCFR)
• 2 CFR 200.403 - Factors affecting allowability (eCFR)
• 2 CFR 200.404 - Reasonable costs (eCFR)
• 2 CFR 200.405 - Allocable costs (eCFR)
• 2 CFR 200.407 - Prior written approval (eCFR)
• 2 CFR Part 200 Subpart E - Cost Principles (eCFR)
• Allowable vs. Unallowable Costs Guide Sheet - Office of Justice Programs
• NIH Grants Policy Statement - Section 7: Cost Considerations
• 2 CFR 200.420 - Selected Items of Cost (eCFR)
• EPA Uniform Requirements for Managing Grants
• Federal Audit Clearinghouse

Source review completed September 13, 2026. Report a correction through the Grantsights editorial policy page and include the affected award or rule citation.