MB Circular A-21

The Office of Management and Budget (OMB) Circular A-21 establishes the principles for determining costs applicable to agreements with educational institutions. For a cost to be allowable it must be

  • Reasonable – A prudent person would have purchased this item and paid this price.
  • Allocable – Expenses can be allocated to the federally activity based on the benefit derived, cause and effect, or other equitable relationship.
  • Consistently Treated – Like expenses must be treated the same in like circumstances.
  • Allowable – Permitted as a direct cost under the specific grant or contract.


A cost may be considered reasonable if the nature of the goods or services, and the price paid for the goods and services, reflects action that a prudent person would have taken given the prevailing circumstances at the time the decision to incur the cost was made.

To determine if an expenditure is reasonable, ask yourself the following questions:

  1. Is the cost a type generally recognized as necessary for the operation of the university or the performance of the sponsored agreement?
  2. Does incurring this expenditure violate any requirements or policies such as university policy, federal and state laws and regulations, and sponsored terms and conditions?
  3. Have the individuals incurring this cost acted with due prudence (discretion and good sense) under the circumstances? Have they considered their responsibilities to the university and sponsor?
  4. Where the actions that were taken with respect to incurring the cost consistent with established university policies and practices applicable to the work of the university, including sponsored agreements?


A cost is allocable to a particular agreement if the goods or services involved can be directly assigned to that agreement.

To determine if an expenditure is allocable, ask yourself the following questions:

  1. Is it incurred solely to advance the work under the sponsored agreement?
  2. Does it benefit both the sponsored agreement and other projects in proportions that can be approximated through the use of reasonable methods?
  3. Is it necessary for the overall operations of the university and, in light of sponsored agreement rules and regulations, is it deemed to be assignable in part to the sponsored project?

Expense Allocation Policies

If an expenditure solely benefits one project, it should be charged directly to that project. However, sometimes an expenditure can benefit two or more projects. Lab chemicals are an example of an expense that could potentially benefit more that one project. When this occurs the expenditure must be charged in the same proportions as the benefits on the respective projects.

OMB Circular A-21 provides two methods for allocation an allowable direct cost to tow or more awards:

  • The Proportional Benefit Rule
    The proportional benefit rule applies when it is possible to determine the proportional benefit of the cost to each project. The cost is allocated according to the proportion of benefit provided to each of the projects.
  • The Interrelationship Rule
    The interrelationship rule applies when it is not possible to determine the proportional benefit to each project because of the interrelationship of the work involved. The cost is distributed on any reasonable and rational basis because the proportional benefit cannot be identified and applies to the individual projects.

Consistently Treated:

All costs incurred for the same purposes in like circumstances must be treated uniformly either as direct costs or as facilities and administrative costs. Since certain costs such as administrative and clerical staff salaries and office supplies are normally treated as F&A costs, these costs cannot be charged directly to federal agreements unless the circumstances related to a particular project are clearly different from the normal operations of the institution.


Costs expressly unallowable or mutually agreed to be unallowable shall be identified and excluded from any billings, claim, application, or proposal related to a sponsored research project.

Sponsoring agencies use the term “allowable” to mean permitted as a direct cost under the terms of a specific grant or contract. Expenditures that are generally allowable for a federal reimbursement may not necessarily be permitted under the terms of a specific grant or contract.