Necessary: Is the item needed to conduct and accomplish the research as described in the scope of the award?
To be necessary, the cost applied must be absolutely essential to achieve a certain result or results. Cost applied to the project MUST be necessary to accomplish the scope of work.
Example of necessary: Yogurt to provide to study participant in order to check of sugar levels in blood.
Example of not necessary: Yogurt to provide at lab meetings as an afternoon snack.
Reasonable: What is considered a reasonable cost? Would you personally pay the cost for the item(s) being purchased? “Would a prudent person pay the amount?”
Costs which are generally recognized as ordinary and necessary and would be incurred by a prudent person in the conduct of normal business can be considered reasonable.
The cost is not excessive or extreme.
Example of not reasonable: Renting a limo to drive to meeting. Cost is excessive for one person thus not reasonable.
Example of reasonable: Renting a limo for a group to drive to meeting. Cost effective and reasonable only if price breakdown is less than each individual paying separate cab fare.
Allocable: How much gets charged to a project?
Costs which are incurred specifically for the award. The cost in incurred for the advancement of work on the project. Cost must be necessary. Applications of cost (aka splitting costs) should be in proportions that can be approximated through reasonable methods.
Unallowable allocation example: Cost of ionized water supply split between two federal projects solely based on the remaining balance of one project.
Allowable allocation example: Cost of ionized water supply split three ways equally between three projects since each project benefits from the usage equally.
Consistently Treated: Like costs must be treated the same in like circumstances…consistently. Cost may be treated as direct cost only or as F&A (facility and administration, also known as overhead, indirect) cost only. If an item is deemed an F&A cost by the UW and then applied as well as a direct cost we are in essences billing twice for the same cost.
Example: Membership and subscription cost are treated as an F&A cost at the UW Madison. This is one of the main reasons why it is not an allowable cost on sponsored projects.
Example: Computer costs are typically considered an F&A cost which is why many purchases are deemed unallowable by a federal sponsor.
Permissible: It must be legal to purchase the item under the law. Cost also must be permissible under the terms and conditions of the award.
Example: Flying first class is okay with a sponsor, but per UW and state guidelines only flying coach is permitted.
Example: Purchasing from a vendor listed on the State of WI Ineligible Vendor List, http://www.bussvc.wisc.edu/purch/inel.html, is not permitted.
Allowable: Allowability of cost is defined specifically in OMB Circular A-21, Section J General Provisions of the cost principals. Special Note: Section J does not indicate whether the cost should be treated as a direct cost or a F&A cost. http://www.whitehouse.gov/omb/rewrite/circulars/a021/a21_2004.html
A cost could be considered allowable even if section J states it is unallowable. This makes the item an exception. An exceptional item thus needs to be necessary, reasonable, allocable, consistently treated and permissible. Please see http://www.cals.wisc.edu/research/management/monitoring.html?4?Cp4 for more information about he exceptional purchase process.
If you have any questions regarding the Cost Principles and how they related your project purchases, please email Sandy Fowler at firstname.lastname@example.org.