Subpart E: Cost Principles

Summary: Subpart E is the definitive "Rulebook of Allowability," dictating exactly what can and cannot be charged to a federal award. It establishes that for a cost to be reimbursed, it must be "Necessary" and "Reasonable" for the project's performance, "Allocable" to the specific grant, and "Consistently Treated" across the organization. This subpart contains a "General Provisions" section that acts as a gatekeeper for all expenses, followed by a list of 55 "Selected Items of Cost" that provide specific guidance on items like personnel, travel, and equipment. For a disaster recovery project, this is where the "Finsweet" logic of grant accounting resides—ensuring that every line item in a "Project Worksheet" (PW) has a corresponding "Allowable" basis. It eliminates "Entertainment," "Lobbying," and "Bad Debts" from federal reimbursement, forcing municipalities to cover those costs with local funds. Subpart E is the

ultimate technical filter that protects the "Fiscal Resiliency" of the grant by ensuring every dollar is spent on mission-critical recovery.

● §200.400 Policy: You must follow the "Fundamental Doctrines" of cost allowability without exception. This is essential because "Good Intentions" are not a defense against charging an unallowable cost to the federal government.

● §200.401 Application: You must apply these principles to all "Subrecipients" as well as your own departments. This is essential to ensure that the "Compliance Chain" is not broken by a third party.

● §200.402 Composition of Costs: You must recognize that the total cost is the sum of "Direct" and "Allocable Indirect" costs. This is essential for accurate "Budgeting" and ensuring you aren't under-claiming your administrative overhead.

● §200.403 Factors Affecting Allowability of Costs: You must ensure costs are "Authorized" under your own local laws as well as federal law. This is essential as a cost that is "Illegal" at the local level is automatically "Unallowable" at the federal level.

● §200.404 Reasonable Costs: You must document that you didn't pay "More than Market" for any service or good. This is essential for the "Prudent Person" test that auditors use to identify waste.

● §200.405 Allocable Costs: You must only charge a grant for the "Proportionate Benefit" it received from an expense. This is essential because charging 100% of a vehicle’s cost to a grant it only uses 10% of the time is "Fraud."

● §200.406 Applicable Credits: You must subtract any "Discounts," "Rebates," or "Insurance Proceeds" from your grant claim. This is essential to ensure the federal government only pays the "Net Cost" of the disaster.

● §200.407 Prior Written Approval: You must get a "Thumbs Up" from the agency before spending on high-risk items like "Capital Expenditures." This is essential because "Forgiveness" is rare in federal grant auditing; you need "Permission."

● §200.408 Limitation on Allowance of Costs: You must be aware that the "Lowest" possible cost principle always applies. This is essential for maintaining "Audit Readiness" and proving you are a good steward of taxpayer money.

● §200.409 Special Considerations: You must check for "Program-Specific" cost rules in your award document. This is essential because some programs (like FEMA PA) have stricter rules than the general 2 CFR 200.

● §200.410 Collection of Unallowable Costs: You must "Self-Correct" and remove unallowable costs as soon as they are identified. This is essential to show the auditor that your "Internal Controls" are active and "Self-Healing."

● §200.411 Adjustment of Previously Transmitted Indirect Cost Rates: You must

"True-Up" your indirect costs at the end of the year. This is essential to ensure you haven't over-charged (or under-charged) the federal government for overhead.

● §200.412 Classification of Costs: You must be "Consistent" in how you label "Direct" vs "Indirect" costs across all your projects. This is essential because "Inconsistency" is the primary way auditors identify "Double Dipping."

● §200.413 Direct Costs: You must identify costs that can be "Specifically Identified" with

a particular project. This is essential for maximizing your "Reimbursement" for project-specific staff and materials.

● §200.414 Indirect Costs: You must use a "Negotiated Rate" or the "10% De Minimis" rate for overhead. This is essential for recovering the costs of "Electricity," "HR," and "Legal" that support the grant but aren't in the project.

● §200.415 Required Certifications: You must have your CFO sign the "Financial Report" certifying that all costs are true and allowable. This is essential as it carries "Personal Liability" for the official signing the document.

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