XVI. Cost Allocation


    Indirect costs are costs of an organization that are not readily assignable to a particular project, but are necessary to the operation of the organization and the performance of the project. Examples of costs usually treated as indirect include those incurred for facility operation and maintenance, depreciation, and administrative salaries.

    Subrecipients other than state departments, cities, counties (and subdivisions thereof) and state colleges, universities, and technology centers will adhere to the Department of Finance and Administration – Policy 03 – Uniform Reporting Requirements and Cost Allocation Plans for Subrecipients of Federal and State Grant Monies.

    This policy statement calls for the development of efficient and effective cost allocation plans and methods of cost determination. The cognizant state agency, as determined by the Department of Finance and Administration, shall be responsible for approval of the cost allocation plan. The term of responsibility shall be indefinite, although responsibility may be reassigned upon written request and justification. Click here for the Policy 3 Cognizant State Agency List. Methods used for allocating costs may differ between types of entities, and may even be different for the same type of entity. However, once an entity receives approval for its particular method of cost allocation, all other state agencies are to accept its application to their programs. This does not mean that all state agencies are required to fully fund the costs that are charged to a particular program under the methods if such costs are not allowable or exceed the prescribed funding percentage or budgets.

    The requirements for the development and submission of indirect cost proposals and cost allocation plans are set out in Appendices III – VI of 2 C.F.R. Part 200, for subrecipients that are a state department, city, county (and subdivision thereof) and state college, university, and technology center. These subrecipients should follow the guidelines applicable to its type of organization:

    2 C.F.R. § 200, Appendix III for Institutions of Higher Education

    2 C.F.R. § 200, Appendix V for State/Local Government Central Service Cost Allocation Plans

    2 C.F.R. § 200, Appendix VII for State/Local/Tribal Indirect Cost Proposals


    Subrecipients must submit to OCJP a copy of the approved cost allocation plan in order to request reimbursement for allocated costs. If a cost allocation plan for recovery of allocated costs is not submitted to OCJP within three months of the start of the award period, there is a possibility that allocated costs will be withheld from reimbursements until a cost allocation plan is received. Subrecipients who are also direct recipients of Federal awards may already have a Federally approved indirect cost rate. If you have negotiated an indirect cost rate with the Federal government, then that rate applies (OCJP will review this on a case by case basis).

  3. COST ALLOCATION PLANS--Central Support Services

    State agencies and local units of government may not charge to an award the cost of central support services supplied by the state or local units of government except pursuant to a cost allocation plan approved by the cognizant Federal agency. The rate which is to be applied may be on a fixed, predetermined, or fixed-with-carry-forward provision.


    A cost allocation plan is a means of distributing to various programs, costs which benefit more than one program and are not directly assigned. Cost allocation is basically a mathematical exercise to distribute costs to programs in a manner that the costs are proportional to the benefit received.

    An agency will incur basically three kinds of costs: direct, administrative, and allocable direct.

    1. Direct costs are those costs that can be identified to benefit a specific program and include:
      1. Salaries of persons who provide direct services to program beneficiaries and work on only one program,
      2. Travel costs that can be specifically identified to benefit a particular program,
      3. Equipment purchased to be used in only one program and maintenance and/or insurance for that equipment,
      4. Supplies which are only used in one program,
      5. Professional Services which benefits a single program and
      6. Printing which benefits a single program.
    2. Administrative Costs are costs that benefit the operations of the entire agency, but cannot be identified to specific programs and include:
      1. Executive Director's salary and benefits (or administrative portion thereof if the Executive Director spends time on program-related activities),
      2. Fiscal Officer's salary and benefits,
      3. Purchasing staff's salary and benefits,
      4. Secretarial support of administrative employees,
      5. Supplies of administrative employees,
      6. Travel of administrative employees,
      7. Occupancy costs (e.g., rent and utilities) of administrative employees,
      8. Postage and telephone costs of administrative employees and
      9. Liability insurance.
    3. Allocable direct costs are simply costs which benefit more than one program but do not fall under the criteria of administrative costs and include:
      1. Salaries and benefits of program employees whose work benefits more than one program,
      2. Travel costs of employees whose work benefits more than one program,
      3. Occupancy costs of programs,
      4. Telephone costs of programs,
      5. Supplies used by more than one program,
      6. Contract for professional services that benefit more than one program,
      7. Rental and maintenance for equipment used by more than one program and
      8. Audit costs. 

    The periodic allocation of actual expenditures, rather than use of a fixed or provisional indirect cost rate, is the most appropriate and equitable method of cost allocation. The following are allowable methods to allocate administrative costs and allocable direct costs. Exceptions will be allowed, providing prior approval of the alternative method is granted from the cognizant state agency. The idea is to allocate to programs and/or fund sources its fair share of the indirect cost.

    Administrative costs should be accumulated in a separate cost pool. After allocating the administrative cost pool its share of the allocable direct costs, the total should be periodically allocated to the programs based on the percentage of total direct program salaries. Another method is using total direct costs to distribute administrative costs. The actual administrative costs are allocated to each program based on its percentage of total direct costs for the period after allocation of allocable direct costs.

    Several different methods may be acceptable for the allocation of allocable direct costs. The following are specific examples:

    1. Salaries and benefits – allocate on the basis of time records, records of the number of clients served, or other approved basis,
    2. Travel – allocate on the same basis as salaries and benefits,
    3. Occupancy costs for program areas – allocate based on the number of square feet occupied by the program area as a percentage of total square feet allocated to all program areas,
    4. Telephone costs – allocate based on the number of personnel, number of line, or other equitable method,
    5. Supplies – allocate based on the number of personnel per program, number of clients served, or other equitable method,
    6. Contracts for services, which benefit more than one program – allocate based on the number of clients served, or other equitable method and
    7. Equipment rental and maintenance – allocated based on usage logs or other equitable method.

    Subrecipients must prepare a narrative describing in detail the methods used to allocate costs to the various programs. The plan should include an organizational chart and documents and schedules to support the allocation methods.

    The following should be used in the preparation of the plan:

    1. Effective period of the proposal,
    2. Certificate of Indirect Costs,
    3. A listing of grants and contracts by Federal agency, amounts, period of performance, and the indirect cost limitations (if any) applicable to each, such as ceiling rates or amount,
    4. Organization Chart showing the structure of the agency during the period for which the proposal applies, along with functional statement noting the duties and/or responsibilities of all units that comprise the agency,
    5. A copy of the financial statements prepared by either a certified public accountant or State government auditor, or a copy of the official budget, if the budget reports the actual expenditures for the year on which the proposal is based, and the audit report, if applicable and
    6. Chart of Accounts

      Submit cost allocation plans for approval to OBF.Grants@tn.gov and copy your program manager if you allocate shared costs to any OCJP grants.  Types of shared costs include rent, utilities, etc.

      If F&A is your cognizant agency and you want to charge indirect costs to your grants, submit both a cost allocation and indirect cost rate to OBF.Grants@tn.gov and copy your program manager. The plan must be approved by F&A prior to having indirect costs approved in your grant budget.  Indirect cost rates must be submitted annually.

Non-federal agencies can select to use the 10% de minimis rate.  The de minimis rate can be charged at 10% of Modified Total Direct Costs (MTDC). MTDC is defined at 2 CFR 200.01 as being:“All direct salaries and wages, applicable fringe benefits, materials and supplies, services, travel, and up to the first $25,000 of each subaward (regardless of the period of performance of the subawards under the award). MTDC excludes equipment, capital expenditures, charges for patient care, rental costs, tuition remission, scholarships and fellowships, participant support costs and the portion of each subaward in excess of $25,000.”The first $25,000 of subawards can be taken when each subaward is initially issued, separately negotiated, or renegotiated over the Federal grant’s period of performance (i.e. not $25,000 for each entity’s fiscal year). Some NFPs have found it helpful to have two separate subaward general ledger accounts: one account that tracks the first $25,000 of subawards and another account that records costs in excess of the first $25,000.

If electing to use the de Minimis rate, fill out and submit the  Certification of De Minimis Indirect Cost Rate Form with the application.