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Allocation is the process of assigning a cost, or a group of costs, to one or more cost objectives. Costs may be allocated only if they advance the work of the project in the same proportion as the cost. For example, technical supplies are allocable if they benefit a project. In addition, costs must be supported by evidence of direct benefit to the project.

Costs should not be charged based on availability of funds. The availability of funds to pay an expense, or its inclusion in a budget is not evidence of the allocability of that expense. For instance, when a Principal Investigator wishes to charge an expense to a project, the Research Administrator may assist the PI in determining whether it will be used on only one project or on many projects, and therefore charge accordingly. If the expense is used on more than one project, determine what proportion of the expense benefits each project and charge accordingly.

A cost is allocable to a sponsored agreement if:

1. It is incurred solely to advance the work under the sponsored agreement.

2. It benefits both the sponsored agreement and other work of the institution, in proportions that can be approximated through use of reasonable methods.

3. It is necessary to the overall operation of the institution and, in light of the principles provided in the OMB Circulars, is deemed to be assignable in part to sponsored projects.

Criterion (1) above indicates the best approach to justify a cost on a specific sponsored agreement. Certain types of costs incurred for the benefit of a specific research agreement may easily be uniquely identified. Examples include approved pieces of equipment, animal costs, or chemicals purchased solely for one project.

Other costs may clearly be allowable and reasonable but a question arises: how best to allocate among one or more sponsored agreements that benefit from that cost? The most typical example of a cost that must be allocated among sponsored projects is general laboratory supplies. Federal Regulations acknowledges that it is sometimes impossible to precisely identify or allocate such costs; governing regulations thus allow for the exercise of judgment: "A precise assessment of factors that contribute to costs is not always feasible, nor is it expected. Reliance, therefore, is placed on estimates in which a high degree of tolerance is appropriate."

Non-administrative supplies purchased in bulk for multiple ongoing projects may not be distributed in an arbitrary manner, e.g., charged entirely to one project one month, and then entirely to another project the second month (unless that is the way that supplies were actually used).