Cost Allocation Methods Explained

When expenses benefit multiple grants, you need a fair and defensible method to allocate costs. This guide covers common allocation methods.

Why Allocation Methods Matter

For federal awards, a directly charged cost must satisfy 2 CFR 200.403–200.405 and 200.412: it must benefit the award in proportion to the charge, receive consistent treatment, and not be shifted to cover another award's shortfall. Award terms and a consistently applied written policy may add constraints. In practice, reviewers look for:

• Consistency - Same method applied similarly
• Reasonableness - Method makes logical sense
• Documentation - Written policies and procedures
• Accuracy - Reflects actual benefit

Common Allocation Methods

Direct Allocation

Expenses charged entirely to one grant.

When to use:

• Expense clearly benefits only one grant
• Personnel works 100% on one grant
• Supplies purchased specifically for one project

Illustrative example: A laptop purchased exclusively for the Youth Program grant, if the cost is allowable under the award and the organization's consistently applied policy. A purchase is not allocable merely because budget remains.

Percentage or Usage-Based Allocation

Split expenses using a documented measure of relative benefit. Budget percentages can be an interim estimate, but should not substitute for evidence of actual benefit when circumstances differ.

When to use:

• Staff split time across grants
• Shared resources with known usage patterns
• Cost-sharing arrangements

Illustrative example: Records reflecting work performed show 60% for Grant A and 40% for Grant B; salary is distributed proportionally, subject to award terms and 2 CFR 200.430 where applicable.

Direct Cost Base Allocation

Allocate based on proportion of direct costs.

Formula: (Grant's direct costs ÷ Total direct costs) × Shared expense

When to use: When direct-cost volume reasonably measures relative benefit. It is not automatically suitable for utilities, supplies, or occupancy; usage, headcount, or square footage may be more representative.

Illustrative math: If Grant A has $100,000 in relevant direct costs and Grant B has $50,000, a cost for which that base reasonably reflects benefit is split 66.67%/33.33%.

Headcount Allocation

Allocate based on number of personnel.

Formula: (Grant's FTEs ÷ Total FTEs) × Shared expense

When to use: When the number of people served drives the cost, such as some IT or HR costs. For office space, usable square footage may better reflect benefit.

Illustrative math: Grant A has 3 FTEs and Grant B has 2 FTEs, producing 60%/40%. Use that split only for a cost whose benefit is reasonably related to FTEs; it does not by itself justify a rent allocation.

Time-Based Allocation

Allocate based on actual time spent.

When to use:

• Personnel costs
• Consultants working across projects
• Equipment usage

Example: Track hours worked on each grant and allocate salary accordingly.

Documentation Requirements

Keep records of:

• Allocation methodology description
• Basis for percentages or formulas
• Evidence of any approval required by organizational policy (board approval is not a universal federal requirement)
• Periodic reviews and updates

Internal operating practices (not prescribed federal procedures)

1. Choose appropriate methods - Match method to expense type
2. Be consistent - Apply methods uniformly
3. Review regularly - Update percentages as circumstances change
4. Document thoroughly - Auditors will ask questions
5. Keep it simple - Overly complex methods cause errors

How GrantLink supports this today

QuickBooks Online remains the accounting source of truth. Add a grant manually or upload its documents, then link the grant's Expenses to the relevant QuickBooks Online activity. That link backfills eligible activity and auto-allocates eligible linked activity; use Ledger, Todos, or manual allocation for exceptions and review. Allocations in GrantLink do not inherently rewrite QuickBooks Online. Any QuickBooks Online write requires explicit permission and its applicable workflow.

Sources

• 2 CFR 200.403–200.405 — allowability, reasonable cost, and allocability
• 2 CFR 200.430 — compensation and records supporting work performed