Allowable Costs Under the Uniform Guidance: Necessary, Reasonable and Allocable
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How we wrote this: A plain-English summary of 2 CFR 200.403, 200.404, 200.405 and 200.420, checked October 29, 2026. General information, not legal or audit advice; your award terms and agency guidance control.
The tests in 2 CFR 200.403
Unless a statute says otherwise, a cost must meet all of these to be allowable:
- (a) Necessary and reasonable for the award, and allocable to it.
- (b) Conform to any limits or exclusions in the cost principles or the award.
- (c) Be consistent with policies that apply uniformly to federally funded and other activities.
- (d) Get consistent treatment. You can't charge a cost as direct if similar costs are charged as indirect.
- (e) Follow GAAP, except where Part 200 provides otherwise for state and local governments and Indian tribes.
- (f) Not be counted toward another federal program's costs or cost share.
- (g) Be adequately documented.
- (h) Fall in the right period. Costs must be incurred in the approved budget period. Administrative closeout costs may run until the final report due date.
Reasonable (2 CFR 200.404)
A cost is reasonable if it doesn't exceed what a prudent person would pay in the circumstances. Consider:
- whether it's ordinary and necessary;
- sound business practice, arm's-length bargaining, and federal, state, local and tribal laws;
- market prices in your area;
- whether the people involved acted prudently; and
- whether it departs from your written policies.
Allocable (2 CFR 200.405(a))
A cost is allocable if it's assignable to the award according to relative benefits received. That means it:
- was incurred specifically for the award;
- benefits the award and other work, and can be split by a reasonable method; or
- is necessary to overall operations and assignable in part to the award.
Specific items (2 CFR 200.420 onward)
Sections 200.420 through 200.476 cover particular costs, such as advertising, entertainment and equipment. 200.420 notes that the list isn't comprehensive: an item not mentioned isn't automatically allowable or unallowable. Judge it against similar items and the general principles.
Practical tip: keep a written policy for each cost type and apply it the same way to every funding source. That's what (c) and (d) look for in an audit; see Single Audit.
Related: de minimis indirect rate, match, SF-425 and closeout.