Direct and indirect costs 

Announcement: Effective December 24, 2014, the Office of Management and Budget (OMB) issued 2 CFR 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, that replaced the administrative, accounting, audit rules and principles formerly promulgated in OMB Circulars A-21, A-110, and A-133.

How to identify direct costs and facilities and administrative (indirect) costs

Identification with the sponsored work rather than the nature of the goods and services involved is the determining factor in distinguishing direct from indirect cost of sponsored agreements.

Direct Costs are those costs that can be identified specifically with a particular sponsored project, an instructional activity, or any other institutional activity, or that can be directly assigned to such activities relatively easily with a high degree of accuracy. Costs incurred for the same purpose in like circumstances must be treated consistently as either direct or indirect costs. Where an institution treats a particular type of cost as a direct cost of sponsored agreements, all costs incurred for the same purpose in like circumstances shall be treated as direct costs of all activities of the institution.

When charging expenses to federally sponsored agreements, Virginia Commonwealth University (VCU) faculty and staff must be aware of the appropriateness of the charges. 2 CFR 200, Subpart E, provides the criteria for direct charging costs to federally sponsored programs.  The basic principle is that costs directly charged to a sponsored project must be allocable, allowable, reasonable and necessary, and treated consistently.

It is the responsibility of the PI, working with the departmental administrator, to ensure that any unallowable costs are removed from the sponsored award and transferred to another source of university funding.

Allocable: The cost must have a direct benefit and be directly attributable to the project or activity being performed.  For example, an investigator purchases a piece of equipment in order to conduct a sponsored project.  This piece of equipment is allocable to that project and can be charged as a direct cost to the project.  The investigator also purchases office supplies for the entire department.  These supplies are not directly attributable to the project and are therefore not allocable and cannot be charged as a direct cost to the project.

Allowable: The cost must be allowed by VCU policy, sponsor policies, and 2 CFR 200, Uniform Administrative Requirements Cost Principles, and Audit Requirements for Federal Awards.  For example, an investigator has three lab technicians working on her project and charges their salary to the project.  These are allowable costs to the project and can be charged as direct costs.  The investigator takes her three lab technicians out to lunch during the project.  This expense is an unallowable cost to the project and cannot be charged as a direct cost.

Reasonable and necessary: The cost must be reasonable and necessary for the performance of the project.  For example, an investigator purchases lab supplies in order to complete the work on his project.  These supplies are reasonable and necessary to the performance of the project and can be charged as direct costs.  The investigator also purchases a new microscope that was on sale at the store where he purchased the lab supplies.  The microscope is not needed for his current project but may be needed for an upcoming project.  This expense is not reasonable and necessary for the performance of the current project and therefore cannot be charged as a direct cost.

Consistently treated: All costs incurred for the same purpose, in like circumstances, are either direct costs only or F&A costs only.  VCU cannot double charge the government for similar costs by directly charging a cost to a sponsored project and by including the same type of cost in the F&A rate charged to that sponsored project.  For example, a Business Manager purchases stamps for the department.  Investigator A uses five stamps for various mailings related to his project and Investigator B uses eight stamps for various mailings related to her project.  If the cost of the stamps is included as a direct cost to Investigator A or B's sponsored project, and similar costs (stamps) incurred in like circumstances (general purpose) are included in the University's F&A rate, the cost are not treated consistently.

Any expense that does not meet all of these criteria should not be directly charged to a federally sponsored project.  Note that approval of a particular expense as a direct cost by the sponsoring agency does not guarantee that the expense constitutes an allowable cost.  The expenditure must also meet the requirements for treating costs consistently as described above. 

How to document direct costs

Facilities and administrative (indirect) costs are those that are incurred for a common or joint purpose and therefore cannot be identified readily and specifically with a particular sponsored project or instructional activity, or any other institutional activity. Expense functions below are generally included in the facilities and administrative cost objective.

How to determine allowable costs

Charging salaries of administrative and clerical staff (Section 200.413):

The salaries of administrative and clerical staff should normally be treated as indirect (F&A) costs. Direct charging of these costs may be appropriate only if all of the following conditions are met:

(1) Administrative or clerical services are integral to a project or activity;

(2) Individuals involved can be specifically identified with the project or activity;

(3) Such costs are explicitly included in the budget or have the prior written approval of the Federal awarding agency; and

(4) The costs are not also recovered as indirect costs.

Memberships and subscriptions: Memberships in professional or scholarly societies and subscriptions to scholarly publications may not be charged directly to a sponsored program. 2 CFR 200.454 lists institutional memberships and subscriptions as allowable. Generally, the library will provide access to periodicals, books and other forms of scholarly publications. These costs are included in the Facilities and Administrative (F&A) (indirect) costs.

General office supplies: General office supplies, including paper, pencils, pens, file folders, staples, etc., may not be directly charged.

Computer supplies and general purpose software: General purpose computer supplies, including computer disks, paper for printers and toner cartridges may not be directly charged. Also included is the general-purpose office software, such as word processing and spreadsheet programs. These items may not be directly charged unless they are specifically justified in the budget and not specifically disallowed.

Ordinary postage: Postage is included as an indirect (F&A) cost with exception of shipping cost applied to the purchase.

Local telephone charges: The basic telephone line charge and local calls may not be charged directly to a sponsored project, except in the rarest circumstances when a separate, dedicated telephone line is necessary solely for the performance of a sponsored project. Local telephone charges may be directly charged for major projects/activities when justified in the budget and not specifically disallowed.

The costs would need to meet the general criteria for direct charging in 2 CFR 200, 413, "to be identified specifically with a particular final cost objective....relatively easily with a high degree of accuracy," and the special circumstances requiring direct charging of the services would need to be justified to the satisfaction of the awarding agency in the grant application or contract proposal.

Banner Account CodeNormally Direct CostsNormally Indirect Costs
510110, 520110, 520120, 520140, 520150, 530110 Salaries, wages, fringe benefits, such as: principal investigator, faculty, research assistant, research associate, scientist, technician, post doc, graduate research assistant, other Administrative and clerical salaries, wages, fringe benefits, such as: fiscal officers, accountant, department administrator, administrative staff officer, secretary, staff assistant
600002, 600017, 600022 Express service for overnight, federal express, US Postal Priority Mail, UPS, freight, delivery when needed to transport project material or report in a non-routine manner Express service for routine delivery of project material or report
635002, 635007, 635012, 635017, 635022, 635027, 635032, 635037, 635042 Postage for mailing a large quantity of questionnaires, research surveys to accomplish the goals of the project  Postage (routine correspondence pertaining to sponsored project)
600012, 653340 Printing to produce bound manuals or print project-related manuscripts and large reports. Duplicating, page charges, reprints, reference materials Printing, reproduction, photocopying
638002   Organizational Membership
638007   Books and subscriptions
  Scientific computer software directly related to the project Computer software and supplies (general purpose such as word processing, spreadsheet programs, diskettes, toner cartridges, printer paper)
620012, 620125   General office supplies,paper, pencils, pens, transparencies, tablets, staples, files, folders, binders, etc.
630002, 630007, 630012, 630022, 630027, 630032, 630037, 630042 Telephone charges-long distance Telephone charges – basic line charge, pagers, local calls, voice mail, (cellular phones unless project-related field work phone)
600182, 620087, 410758   Laundry, linen services and supplies. Wash and Dry vending

The Treatment of Administrative and Clerical Costs


Administrative issues

Q. I am a university research administrator and one of our NIH-funded investigators would like to use a cell line that was created after August 9th, 2001 and it is not eligible for research using Federal funds. What should I tell the investigator who wants to work with these cells in his laboratory?

A. Institutions need to provide clear instructions to investigators who conduct research that is "unallowable" under Federal research funding policy. In laboratories where there is both Federal and non-Federal funding, investigators and their staffs must separate allowable and unallowable activities in such a way that permits the costs incurred in the research to be allocated consistently to the appropriate funding source. In your example, for instance, the time and effort of laboratory personnel working on the stem cell line created after August 9, 2001, may not be charged to any Federal grant. Acquisition of equipment, use of cell and tissue culture supplies in the project, and travel to a conference to discuss or present this work likewise may not be Federally supported.

Q. I am an investigator that receives NIH funding and I am planning to derive new human embryonic stem cell lines. Can I conduct the derivations in my laboratory, or do I need to find a non-university funded laboratory to do this work?

A. You may do the derivation in your university supported laboratory as long as: 1) you carefully and consistently allocate all costs of doing the derivation to a non-Federal funding source; and 2) your university or research center has in place a method of separating the costs of supporting your laboratory so that any of the facilities and administrative (F&A) costs allocable to your new stem cell line work are excluded from the federal share of the organized research cost base, per the provisions of 2 CFR 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards.   

Q. Can you explain what accounting principles are necessary to demonstrate that unallowable charges are not being absorbed by NIH funded research, e.g., indirect costs?

A. The cost principles contained in 2 CFR 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, particularly with regard to treatment of allowable and unallowable costs, contain the necessary guidance. Federal policy is explicitly clear that no Federal funding may be used, either directly or indirectly, to support human embryonic stem cell research outside the criteria established by the President on August 9, 2001, i.e., it is unallowable. Therefore, the direct costs of such work must be charged only to non-Federal sources of funding. With respect to indirect costs, also known as facilities and administrative (F&A) costs, institutions engaged in unallowable stem cell work must be able to demonstrate that none of the costs of supporting this work have been included in the rates established and used to charge F&A costs to federally funded research.

How to document allowable costs

Personnel: Payroll costs for employees working on grants and contracts should be reflected at the level proposed and certified to actually performed. Salary adjustment should be consistent with University’s Policy and Procedures. The principal investigator should submit the Personnel Action Form (PAF) through the appropriate channel as required by the particular department or school. Consult the fiscal administrator in the department/school for procedures. The PAF and effort certification reports are the documented source for direct charges to grants/contracts.

Long distance telephone and fax costs: These costs should be linked to the sponsored agreement by means of a detailed log and analyzing the long distance phone bill or using a direct telephone code. Arbitrary allocations are not permitted.

General office supplies: Supplies drawn from a central storeroom or inventory must be charged directly to a sponsored index if their applicability to the sponsored agreement is recorded at the time of withdrawal. All such costs must be charged to the sponsored index based on the anticipated usage at the time of withdrawal.

Other costs

Consultant services

In order to comply with University and Federal regulations for disbursing funds for consultants and contractual services on grants and contracts, there must be evidence that the following criteria have been met: 

  • The services to be provided are essential and cannot be provided by persons receiving salary support under the grant.
  • A selection process has been employed to secure the most qualified person available and a senior officer of the grantee or organization has approved the selection.
  • The charge is appropriate considering the qualifications of the consultant, his/her normal charges, and the nature of the services rendered. If the consultant is an employee of the grantee institution, the consultant must be across departmental lines and in addition to actual duties or it must involve a separate or remote operation, and the work performed is in addition to the consultant's regular departmental work.

The determination as to compliance with the above provisions may be made at the University level.

Unless consultant costs are specifically outlined in the approved budget and there is evidence that the above criteria have been met, the principal investigator must maintain records to support the selection process.


The travel policies and procedures apply to travel on grants and contracts, unless the sponsor’s policies are more restrictive.

The travel must directly benefit the grant/contract to be allowable. The terms and conditions of the award will specify whether sponsor approval in advance is required.

All requests for travel authorizations for sponsored programs are forwarded to Accounts Payable and Support Services. 

The principal investigator should ensure the allowability of travel costs and availability of budget prior to submitting the travel request. If the request causes travel expenditures to exceed the travel budget, the department should re-budget funds prior to the travel being incurred.

Travel costs that exceed charges normally allowed by the institution in its regular operations as a result of an institutional policy, commercial airfare costs in excess of the lowest available commercial discount airfare, Federal Government contract airfare or customary standard airfare unless not available, must be justified and documented on a case-by-case basis and applicable condition. Air travel by other than commercial carrier shall not exceed the cost of allowable commercial air travel.

Foreign travel may require specific prior approval for each trip and American flag carrier restrictions normally apply.


In most cases, equipment purchases are itemized and approved in the original budget. Prior approval may be necessary from the sponsor to purchase equipment that has not been authorized. The department must maintain justification for the purchase of general-purpose equipment when it is not included in the budget.

Fabrication is defined as special purpose equipment that is to be assembled or fabricated that will result in an article of nonexpendable tangible property. Fabrication is allowed when it is more economically feasible or if fabrication is the only means of acquiring specialized equipment.

Generally, the University is directly accountable for each item of government contracts equipment at termination of the contract. Under most government grants, equipment is vested with the University, with the exception that certain agencies may reserve the right to transfer the equipment following completion of the contract. This right is reserved to facilitate cases where the principal investigator transfers to another institution and the grantee has no further need for the equipment.

Service center charges

Services from a service center should be charged directly to the sponsored index under these procedures. (See University procedures for the Financial Management of Service Centers)