Policies & Procedures


Section: C&G
Part: POL
Statement No.: 4.4
Date: 12/12/01
University of North Carolina - General Administration
Administrative Policies and Procedures Manual
Title: Direct Costs - Unallowable and Allowable

The criteria for determining whether costs are allowable as charges to sponsored projects is defined by OMB Circular A-87 and UNC's F & A Rate Agreement. These predetermined allowable and unallowable costs apply to all federally sponsored projects and any non-federally sponsored projects which reference Federal regulations or which fail to specify a basis for determination of allowable costs. For a complete description of the circumstances where a cost is allowable consult the "Award Code Sheet" for specific projects and OMB Circular A-87, Attachments A and B.

Expenses identified below as allowable may be charged to sponsored projects unless specifically prohibited by the sponsor.

Expenses identified below as unallowable may not be charged to sponsored projects unless the awarding agency provides specific prior approval.

The budget, as approved by the sponsor, and policy restrictions of the sponsor must be consulted for each sponsored project.

If a cost is not included below, The Division of Finance will respond to questions about whether a specific cost is allowable as a direct charge to a sponsored project.

All state and UNC regulations and administrative procedures (travel reimbursements, consulting, equipment purchases, payroll, purchasing, etc.) apply to expenditures charged to sponsored projects.

Purchases of goods or services made in the last three months of an award period are scrutinized by auditors to ensure that the costs can meet the criteria of "allowable" costs as defined by OMB Circular A-87. All direct costs must be reasonable, allocable and timely.

If the expenditure cannot meet these criteria, the cost may be considered an "unallowable" charge against the sponsored award. This may require transferring the cost to another account or disallowing the cost in its entirety.


The following is an appended description of allowable and unallowable costs as defined in OMB Circular A-87. Consult EXH 4.1 for the complete citation.

Subject to the criteria in Statement No. 4.1 (reasonable, allocable, and timely) and specific conditions or requirements indicated for each cost by the sponsored agreement, the following costs are allowable charges to sponsored projects.

Advertising and public relations costs.

    a. The term "advertising costs" means the costs of advertising media and corollary administrative costs. Advertising media include magazines, newspapers, radio and television programs, direct mail, exhibits, and the like.

    b. The term "public relations" includes community relations and means those activities dedicated to maintaining the image of the governmental unit or maintaining or promoting understanding and favorable relations with the community or public at large or any segment of the public.

    c. Advertising costs are allowable only when incurred for the recruitment of personnel, the procurement of goods and services, the disposal of surplus materials, and any other specific purposes necessary to meet the requirements of the Federal award. Advertising costs associated with the disposal of surplus materials are not allowable where all disposal costs are reimbursed based on a standard rate as specified in the grants management common rule.

    Public relations costs are allowable when:

      (1) Specifically required by the Federal award and then only as a direct cost;

      (2) Incurred to communicate with the public and press pertaining to specific activities or accomplishments that result from performance of the Federal award and then only as a direct cost; or

      (3) Necessary to conduct general liaison with news media and government public relations officers, to the extent that such activities are limited to communication and liaison necessary to keep the public informed on matters of public concern, such as notices of Federal contract/grant awards, financial matters, etc.

Unallowable advertising and public relations costs include the following:

      (1) All advertising and public relations costs other than as specified in subsections c. and d.;

      (2) Except as otherwise permitted by these cost principles, costs of conventions, meetings, or other events related to other activities of the governmental unit including:

          (a) Costs of displays, demonstrations, and exhibits;

          (b) Costs of meeting rooms, hospitality suites, and other special facilities used in conjunction with shows and other special events; and

          (c) Salaries and wages of employees engaged in setting up and displaying exhibits, making demonstrations, and providing briefings;

      (3) Costs of promotional items and memorabilia, including models, gifts, and souvenirs; and

      (4) Costs of advertising and public relations designed solely to promote the governmental unit.

    Advisory councils. Costs incurred by advisory councils or committees are allowable as a direct cost where authorized by the Federal awarding agency or as an indirect cost where allocable to Federal awards.

    Alcoholic beverages. Costs of alcoholic beverages are unallowable.

    Budgeting. Costs incurred for the development, preparation, presentation, and execution of budgets are allowable.

    Communications. Costs of telephone, mail, messenger, and similar communication services are allowable.

    Compensation for personnel services.

      a. General. Compensation for personnel services includes all remuneration, paid currently or accrued, for services rendered during the period of performance under Federal awards, including but not necessarily limited to wages, salaries, and fringe benefits. The costs of such compensation are allowable to the extent that they satisfy the specific requirements of this Circular, and that the total compensation for individual employees:

        (1) Is reasonable for the services rendered and conforms to the established policy of the governmental unit consistently applied to both Federal and non-Federal activities;

        (2) Follows an appointment made in accordance with a governmental unit's laws and rules and meets merit system or other requirements required by Federal law, where applicable; and

      b. Reasonableness. Compensation for employees engaged in work on Federal awards will be considered reasonable to the extent that it is consistent with that paid for similar work in other activities of the governmental unit. In cases where the kinds of employees required for Federal awards are not found in the other activities of the governmental unit, compensation will be considered reasonable to the extent that it is comparable to that paid for similar work in the labor market in which the employing government competes for the kind of employees involved.

      c. Unallowable costs. Costs, which are unallowable under other sections of these principles, shall not be allowable under this section solely on the basis that they constitute personnel compensation.

    Fringe benefits.

      (1) Fringe benefits are allowances and services provided by employers to their employees as compensation in addition to regular salaries and wages. Fringe benefits include, but are not limited to, the costs of leave, employee insurance, pensions, and unemployment benefit plans. Except as provided elsewhere in these principles, the costs of fringe benefits are allowable to the extent that the benefits are reasonable and are required by law, governmental unit-employee agreement, or an established policy of the governmental unit.

      (2) The cost of fringe benefits in the form of regular compensation paid to employees during periods of authorized absences from the job, such as for annual leave, sick leave, holidays, court leave, military leave, and other similar benefits, are allowable if: (a) they are provided under established written leave policies; (b) the costs are equitably allocated to all related activities, including Federal awards; and, (c) the accounting basis (cash or accrual) selected or costing each type of leave is consistently followed by the governmental unit.

      (3) The cost of fringe benefits in the form of employer contributions or expenses for social security; employee life, health, unemployment, and worker's compensation insurance (except as indicated in section 25, Insurance and indemnification); pension plan costs (see subsection e.); and other similar benefits are allowable, provided such benefits are granted under established written policies. Such benefits, whether treated as indirect costs or as direct costs, shall be allocated to Federal awards and all other activities in a manner consistent with the pattern of benefits attributable to the individuals or group(s) of employees whose salaries and wages are chargeable to such Federal awards and other activities.

    Severance Pay. Payments in addition to regular salaries and wages made to workers whose employment is being terminated are allowable to the extent that, in each case, they are required by (a) law, (b) employer-employee agreement, or (c) established written policy.

    Donated services. Donated or volunteer services may be furnished to a governmental unit by professional and technical personnel, consultants, and other skilled and unskilled labor. The value of these services is not reimbursable either as a direct or indirect cost. However, the value of donated services may be used to meet cost sharing or matching requirements in accordance with the provisions of the Common Rule.

    Entertainment. Costs of entertainment, including amusement, diversion, and social activities and any costs directly associated with such costs (such as tickets to shows or sports events, meals, lodging, rentals, transportation, and gratuities) are unallowable.

    Equipment means an article of nonexpendable, tangible personal property having a useful life of more than one year and an acquisition cost which equals the lesser of (a) the capitalization level established by the governmental unit for financial statement purposes, or (b) $5000.

      a. Items of equipment with an acquisition cost of less than $5000 are considered to be supplies and are allowable as direct costs of Federal awards without specific awarding agency approval.

    Lobbying. The cost of certain influencing activities associated with obtaining grants, contracts, cooperative agreements, or loans is an unallowable cost. Lobbying with respect to certain grants, contracts, cooperative agreements, and loans shall be governed by the common rule, "New Restrictions on Lobbying" published at 55 FR 6736 (February 26, 1990), including definitions, and the Office of Management and Budget "Government-wide Guidance for New Restrictions on Lobbying" and notices published at 54 FR 52306 (December 20, 1989), 55 FR 24540 (June 15, 1990), and 57 FR 1772 (January 15, 1992), respectively.

    Materials and supplies. The cost of materials and supplies is allowable. Purchases should be charged at their actual prices after deducting all cash discounts, trade discounts, rebates, and allowances received.

    Memberships, subscriptions, and professional activities.

      a. Costs of the governmental unit's memberships in business, technical, and professional organizations are allowable.

      b. Costs of the governmental unit's subscriptions to business, professional, and technical periodicals are allowable.

      c. Costs of meetings and conferences where the primary purpose is the dissemination of technical information, including meals, transportation, rental of meeting facilities, and other incidental costs are allowable.

      d. Costs of membership in civic and community, social organizations are allowable as a direct cost with the approval of the Federal awarding agency.

      e. Costs of membership in organizations substantially engaged in lobbying are unallowable.

    Pre-award costs. Pre-award costs are those incurred prior to the effective date of the award directly pursuant to the negotiation and in anticipation of the award where such costs are necessary to comply with the proposed delivery schedule or period of performance. Such costs are allowable only to the extent that they would have been allowable if incurred after the date of the award and only with the written approval of the awarding agency.

    Cost of professional and consultant services rendered by persons or organizations that are members of a particular profession or possess a special skill, whether or not officers or employees of the governmental unit, are allowable, when reasonable in relation to the services rendered and when not contingent upon recovery of the costs from the Federal Government.

    Publication and printing costs. Publication costs, including the costs of printing (including the processes of composition, plate-making, press work, and binding, and the end products produced by such processes), distribution, promotion, mailing, and general handling are allowable.

    Rental costs. Rental costs are allowable to the extent that the rates are reasonable in light of such factors as: rental costs of comparable property, if any; market conditions in the area; alternatives available; and, the type, life expectancy, condition, and value of the property leased.

    Travel costs

      a. General. Travel costs are allowable for expenses for transportation, lodging, subsistence, and related items incurred by employees traveling on official business. Such costs may be charged on an actual cost basis, on a per diem or mileage basis in lieu of actual costs incurred, or on a combination of the two, provided the method used is applied to an entire trip, and results in charges consistent with those normally allowed in like circumstances in non-federally-sponsored activities.

      b. Lodging and subsistence. Costs incurred by employees and officers for travel, including costs of lodging, other subsistence, and incidental expenses, shall be considered reasonable and allowable only to the extent such costs do not exceed charges normally allowed by the governmental unit in its regular operations as a result of the governmental unit's policy.

      c. Commercial air travel. Airfare costs in excess of the customary standard (coach or equivalent) airfare, are unallowable except when such accommodations would: require circuitous routing, require travel during unreasonable hours, excessively prolong travel, greatly increase the duration of the flight, result in increased cost that would offset transportation savings, or offer accommodations not reasonably adequate for the medical needs of the traveler. Where a governmental unit can reasonably demonstrate to the awarding agency either the nonavailability of customary standard airfare or Federal Government contract airfare for individual trips or, on an overall basis, that it is the governmental unit's practice to make routine use of such airfare, specific determinations of nonavailability will generally not be questioned by the Federal Government, unless a pattern of avoidance is detected. However, in order for airfare costs in excess of the customary standard commercial airfare to be allowable, e.g., use of first-class airfare, the governmental unit must justify and document on a case-by-case basis the applicable condition(s) set forth above.