THE UNCOMMON SECRET OF COMMON SENSE IN DETERMINING REASONABLE COSTS. DO YOU KNOW WHAT TO LOOK FOR?
In order to charge costs to a Federal award, the costs must be allowable.
Part of the criteria for costs to be allowable is that they must be “reasonable.”
In this section we’ll dig deeper into one of the cornerstone concepts in the Cost Principles regulations: The “reasonableness” of costs spent on a Federal award.
Reasonable Costs Video Lesson.
Length: Approx. 3 minutes
How do you tell if costs are “reasonable”?
Here are some guidelines you can use to determine if costs are “reasonable” and therefore pass the first hurdle of allowability for award spending.
Grant Management Basics: Reasonable Costs
In the section of the Uniform Guidence in 2 CFR Part 200 cover the Cost Principles, “reasonable” costs are defined as an amount of an expenditure that doesn’t exceed the amount a person using good judgment and common sense would have spent under the circumstances to purchase the items.
To paraphrase Will Rogers “You can’t legislate…common sense into people.”
Yet this is exactly what the Cost Principles are trying to do with setting a hurdle of “reasonableness” on the allowability of costs for Federal grants.
They even have a name for it—called the “prudent person” standard.
Who says what is “reasonable”?
The term “reasonable” in the Cost Principles regulations measures the decision under the circumstances in place when the decision was made.
So the “prudent person” gets to decide based on the place and time what the “reasonable” approach is.
For example, the cost of a bottle of water may be very different in the middle of a desert than in the middle of a major city, though both purchases could be considered “reasonable” to a prudent person.
Do I want it, or do I need it?
A component of the definition for “reasonable” includes looking at the “necessity” of the spending.
“Necessary” costs are needed for the performance or administration of the Federal award.
Not because it’s the latest gadget from Apple.
Do I need the latest iPhone, or do I want it?
Examples of questions that test the necessity, and therefore the reasonableness, of a purchase are:
- Do I really need to make this purchase for the award?
- Is this the least amount I could spend and still meet my needs for the efficient and effective performance of the award?
- Can I reasonably expect to use the amount of the product or services I am purchasing?
- Did I pay a “fair” price for the items?
- Would I feel comfortable defending this purchase to a taxpayer, my grandmother, or the Federal agency?
Four “red flags” to avoid in Grant spending
Now let’s look at “red flag” areas that are reviewed in determining “reasonableness” of costs. Here are four areas that scrutiny reminiscent of a TSA screening.
- Are the costs consistent with generally accepted sound business practices?
- Was the purchase made with “arm’s length” bargaining?
- Is the price paid similar to market prices for comparable goods and services?
- Were there significant deviations from established policies and practices of the organization?
Remember, actions that unjustifiably increase the costs to the Federal Government would not be considered “reasonable” according to the regulations.
Exercise uncommon common sense
The goal (hope, wish, threat) underlying the “reasonableness” standard is that people will exercise common sense when spending grant funds.
Individuals are expected to use good sense and consider their responsibilities to the best interests of the Federal Government, the taxpayers, and their own organization.
Oh yes, there is the big stick.
If costs are not defendable as “reasonable” they risk being disallowed by your funding agency.
So be reasonable!
P.S. Here’s even more free information.
Don’t miss your own very cool, one page “Quick Reference Guide: Reasonable Costs.”
(Just click on the link to download the .pdf file.)
Want to find out even more?
You can find out more about the various Cost Principles Requirements in our Grant Management Boot Camp
There are 4 “Boot Camp” modules covering the main areas related to Cost Principles requirements for recipients of Federal awards:
- Module: Cost Principles for Direct Costs
- Module: Cost Principles for Indirect Costs
- Module: Selected Items of Allowable Costs
- Module: Selected Items of Unallowable Costs