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

Funders and auditors expect:

• 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

Example: A laptop purchased exclusively for the Youth Program grant.

Percentage Allocation

Split expenses by predetermined percentages.

When to use:

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

Example: An employee works 60% on Grant A, 40% on Grant B. Their salary is allocated proportionally.

Direct Cost Base Allocation

Allocate based on proportion of direct costs.

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

When to use:

• Utility costs
• General supplies
• Common area expenses

Example: If Grant A has $100K in direct costs and Grant B has $50K, shared costs are split 67%/33%.

Headcount Allocation

Allocate based on number of personnel.

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

When to use:

• Office space
• IT support
• Administrative overhead

Example: Grant A has 3 staff, Grant B has 2 staff. Rent is split 60%/40%.

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.

Setting Up Allocation Rules in GrantLink

1. Go to Todos
2. Click Add Rule
3. Configure:
   • Trigger (vendor, account, amount range)
   • Method (percentage, formula)
   • Target grants and splits
4. Save

Future matching transactions auto-allocate.

Documentation Requirements

Keep records of:

• Allocation methodology description
• Basis for percentages or formulas
• Board approval of allocation policy
• Periodic reviews and updates

Best Practices

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