Cost Principles and Unallowable Costs

Cost Principles

To be appropriate for a sponsored project, costs must be:

These cost principles are based on the Uniform Guidance and the FAR, part of the Code of Federal Regulations (eCFR).


A cost is allowable when:

  • Its purpose is specifically related to the sponsored award and necessary for project performance.
  • It provides benefit in proportion to the amount charged.
  • It is in agreement with Institute policies.

A cost allowable on one project may be unallowable on another.

Factors affecting the allowability of costs (CFR 200.403):

  • Costs necessary, reasonable and given consistent treatment
  • Costs conforming to limits in the agreement or under federal cost principles (CFR 200.420 Considerations for Selected Items of Cost)
  • Costs must be adequately documented
  • Costs not included as a cost or used to meet cost sharing or matching requirements of any other federally-financed program in either the current or a prior period
  • Costs serve an Institute business purpose, including instruction, research, and public service
  • Costs permissible according to MIT policy and federal regulations, regardless of whether it is a sponsored project
  • Costs permissible for a sponsored project according to the terms and conditions of the sponsored agreement


A cost is allocable when it provides direct benefit to the project and can be specifically tied to the project (CFR 200.405). Costs may be allocable to multiple projects where allocated appropriately across all projects that benefit.

An allocable cost:

  • Is incurred specifically for the federal award (2 CFR 200.405(a)(1))
  • Benefits both the federal award and other work of the non-federal entity and can be distributed in proportions that may be approximated using reasonable methods (2 CFR 200.405(a)(2))
  • Is necessary to the overall operation of the non-federal entity and is assignable in part to the federal award in accordance with the principles in this subpart (2 CFR 200.405(a)(3))


A cost is reasonable if:

  • A prudent person would incur the costs at the time they are expensed.
  • It is generally recognizable as necessary for the success of the project.
  • It is consistent with Institute and sponsor policy.  

Factors determining whether a cost is reasonable (CFR 200.404):

  • The cost is ordinary and necessary for the performance of the activity.
  • The cost does not exceed what a prudent person would pay in the course of business.
  • The cost meets Federal and State laws, sponsored agreement terms and agency regulations.
  • Incurrence of the cost is consistent with established Institute policies and practices.


A cost is consistent when costs incurred for the same purpose in like circumstances are treated consistently as either direct or indirect costs

To ensure consistency, follow Institute policies on direct and indirect costs. Institute policies are based on:

Unallowable Costs

Activities and transactions could be considered unallowable costs due to federal regulations, Institute policy, sponsor guidelines or terms and conditions of a sponsored project. Costs unallowable for federal reimbursement may be allowable on a non-federal project with the prior approval of the sponsor.

Unallowable Activities

Unallowable activities where the function is prohibited for reimbursement by federal regulation include:

  • Alumni activities
  • Organized fundraising
  • Lobbying
  • Commencement and Convocation
  • General public relations and alumni activities
  • Student activities such as intramural activities and student clubs
  • Managing investments solely to enhance income
  • Prosecuting claims against the federal government
  • Defending or prosecuting certain criminal, civil, or administrative proceedings
  • Housing and personal living expenses of Institute officers
  • Selling or marketing of goods and services (does not include selling goods or services internal to the Institute by its service centers)

Unallowable Transactions

Unallowable transactions where the expenditure itself is for an item that is prohibited even if otherwise allowable with Institute funds include:

  • Advertising (only certain types are allowable)
  • Alcoholic beverages
  • Entertainment
  • Fundraising or lobbying costs
  • Fines and penalties
  • Memorabilia or promotional materials
  • Relocation costs if employee resigns within 12 months
  • Certain recruitment costs, such as color advertising
  • Certain travel costs, such as first-class travel
  • Cash donations to other parties, such as donations to other universities
  • Interest payments, except certain interest specifically coded as paid to outside parties and authorized by the Office of Finance
  • Membership in civic, community, and social organizations or in dining and country clubs (seldom reimbursable by MIT)
  • Goods or services for the personal use of employees, including automobiles
  • Insurance against defects in MIT’s materials or workmanship
  • Bad debt expense
  • First class travel

Award Terms Affecting Allowable Costs

Follow Application of Award Terms where restrictive or permissive conditions in the actual award document take precedence.

For example:

  • If a sponsor specifies that international travel costs cannot be charged to a particular project, then those costs may not be charged to that project, even though MIT and federal regulations may allow them.
  • If a research project requires the purchase of an otherwise “unallowable,” the purchase may be an allowable cost. For example, a behavioral study of memory and alcohol requires the purchase of alcohol to conduct the study.

Updated March 26, 2024