3.1.4 Cost Policy

One-third of all funding for University expenditures comes from the federal government. Most of this funding comes in the form of direct support for sponsored projects, but a substantial portion comes in the form of reimbursement for indirect costs of federally sponsored grants and contracts. Stanford tracks whether University activities are allowable for reimbursement using the Project, Task and Award (PTA) to which transactions are charged, and tracks allowable and unallowable cost objects through the Expenditure Type used to record transactions.

Employees must pass ORA-1101: Cost Policy and FIN-0103: Approving Financial Transactions training in order to be granted signature authority in the Oracle Financial system. For more information visit Stanford's Gateway to Financial Activities.  

Direct Costs are expenses that can be identified specifically with a particular sponsored project or other direct cost objective, such as Auxiliary Activities or Instruction, or expenses that can be directly assigned to such activities relatively easily with a high degree of accuracy.

Example: cost of materials used on a project

Indirect Costs are those incurred for common or joint objectives and therefore cannot be identified readily with a particular sponsored project. Indirect costs are sometimes called Facility & Administrative (F&A) or overhead costs.

Example: costs of buildings or utilities

Rules for allowability are covered in the government document OMB Circular A-21 and federal regulations. In many cases, the issue of whether a particular cost is allowable is a complex one. When in doubt, consult with your local financial or research administrator, the Office of Sponsored Research or Research Financial Compliance and Services (RFCS). All unallowable activities and objects (line items) must be coded as such. In general, expenses are chargeable to the federal government only if they are:

• Reasonable
  A prudent person would have purchased this item and paid this price.
• Allocable
  Expenses can be allocated to the government activity based on benefit derived, cause and effect, or other equitable relationship.
• Consistently Treated
  Like expenses must be treated the same in like circumstances.
• Allowable
  Allowable for reimbursement as specified by government regulations.

If an expense cannot meet the above criteria, it is not eligible to be charged to a federal grant or contract no matter what its purpose.

Note: Agencies that sponsor grants and contracts use the term allowable to mean permitted as a direct cost under the terms of a specific grant or contract. Expenses that are generally allowable for federal reimbursement may not necessarily be permitted under the terms of a specific grant or contract.

Expenses that are unallowable for federal reimbursement as a direct or indirect cost may still be reasonable and necessary business expenses permitted by the University, as outlined in the Administrative Guide. Departments may incur these expenses, but they must be coded as unallowable so they can be readily identified and excluded from the indirect cost calculation. A detailed list of specifically unallowable activities (Tasks) and objects (Expenditure Types) is provided in the Cost Policy Tutorial.