Cost Allocation Methods Explained

When one expense benefits more than one grant, you need a fair method to split it, and you need to be able to explain that method. This guide covers the common allocation methods and when each one fits.

Why the allocation method matters

For a federal award, a cost must be allocable to the award in proportion to the benefit the award received, under 2 CFR 200.405. Under 2 CFR 200.403, the cost must also get consistent treatment. Under 200.405(c), you can't move a cost to another federal award to cover a funding shortfall. Award terms and your own written policy can add further limits. Reviewers usually check four things:

• The method is applied the same way in similar situations.
• The method makes sense for the type of cost.
• The method is written down in a policy or procedure.
• The result reflects the actual benefit to each grant.

Common allocation methods

Direct charging

A direct charge assigns the whole expense to one grant. Use it when the expense benefits only that grant, e.g., a person who works only on that grant, or supplies bought only for that project.

For example, a laptop bought only for the Youth Program grant can be charged to that grant, as long as the cost is allowable under the award and your policy. Money left in a budget line does not make a purchase allocable to that grant.

Percentage or usage allocation

A percentage allocation splits an expense using a documented measure of how much each grant benefited. Use it for staff who split their time across grants, and for shared resources with known usage. Budget percentages can serve as an interim estimate, but you should update them when the actual benefit is different.

For example, if records of the work performed show 60% for Grant A and 40% for Grant B, you split the salary 60/40. For federal awards, the salary charge also has to meet the documentation standards in 2 CFR 200.430(g).

Direct cost base allocation

A direct cost base allocation splits a shared cost by each grant's share of direct costs. The formula is (grant's direct costs ÷ total direct costs) × shared expense.

Use this method only when direct cost volume is a reasonable measure of benefit. It is often a poor fit for utilities, supplies, or rent, where usage, headcount, or square footage may reflect the benefit better.

For example, if Grant A has $100,000 in relevant direct costs and Grant B has $50,000, the shared cost is split 66.67% to Grant A and 33.33% to Grant B.

Headcount allocation

A headcount allocation splits a shared cost by the number of staff working on each grant. The formula is (grant's FTEs ÷ total FTEs) × shared expense, where an FTE is one full-time equivalent employee.

Use it when the number of people drives the cost, e.g., some IT or HR costs. For office space, usable square footage often reflects the benefit better.

For example, if Grant A has 3 FTEs and Grant B has 2 FTEs, the split is 60% and 40%. Use that split only for costs that rise and fall with staff count, and don't use it by itself to justify a rent split.

Time allocation

A time allocation splits a cost by the actual time spent on each grant. Use it for personnel costs, consultants who work across projects, and equipment use. For example, you track the hours each person works on each grant and allocate their salary in the same proportion.

Documentation to keep

Keep these records for each allocation method:

• A description of the method
• The basis for each percentage or formula
• Any approval your own policy requires (federal rules don't require board approval of allocation methods)
• Records of each periodic review and update

Suggested internal practices

The steps below are internal practices, not federal requirements.

1. Match each method to the type of expense.
2. Apply each method the same way every time.
3. Update the percentages when the facts change.
4. Write down the method and the reasons for it, because auditors will ask.
5. Keep the methods simple, because complex methods cause errors.

How GrantLink supports this today

QuickBooks Online remains your accounting system. In GrantLink, you add a grant by hand or by uploading its award documents. Then, in the grant's QuickBooks section, you choose the QuickBooks records for that grant under Expenses and Money received. GrantLink automatically allocates matching QuickBooks expense activity to the grant. You can classify or split other transactions on the Ledger page.

GrantLink is read-only toward QuickBooks by default, so allocations in GrantLink don't change your QuickBooks transactions. An admin can allow specific QuickBooks updates in Settings > QuickBooks > Permissions, and each update still needs its own review before GrantLink applies it.

Sources

• 2 CFR 200.403, factors affecting allowability, including consistent treatment
• 2 CFR 200.405, allocable costs
• 2 CFR 200.430, compensation for personal services, with documentation standards in paragraph (g)