Cost Allocation Plan: Eligibility, Drafting, and NICRA Approval

A cost allocation plan is the formal document an organization uses to show how it distributes shared expenses across programs funded by federal awards. State, local, and tribal governments are required to have one under 2 CFR Part 200, and most nonprofits managing federal grants need either a cost allocation plan or an indirect cost rate proposal. The purpose is straightforward: keep federal dollars from subsidizing unrelated activities by tracing every shared cost back to the programs that actually benefit from it.

Who Has to Have One

The primary audience is state, local, and tribal governments that run centralized departments serving multiple programs. Under 2 CFR 200.416, when a central office provides services like IT, payroll, purchasing, or accounting to operating agencies carrying out federal awards, the government has to prepare a central service cost allocation plan showing how those costs are distributed.¹ Each operating department then typically claims its share of indirect costs through a separate indirect cost rate.

Nonprofits face a parallel rule. Under Appendix IV to Part 200, a nonprofit receiving federal awards must submit an indirect cost proposal to its cognizant agency unless it uses the de minimis rate described below.² A nonprofit that has never had a negotiated rate must file its initial proposal within three months of receiving its first federal award. After that, new proposals are due within six months after the close of each fiscal year.

The cognizant agency is the federal department responsible for reviewing the plan, generally the one providing the largest dollar value of direct federal awards to the organization.³ For a government-wide central service plan, it is the agency with the largest total federal awards to the governmental unit overall. The Department of Health and Human Services handles reviews for many nonprofits and state health and human services agencies through its Cost Allocation Services division.⁴

One related threshold to watch: organizations that spend $1,000,000 or more in federal awards during a fiscal year trigger the Single Audit requirement, which examines whether federal expenditures, including those charged through the plan, comply with program requirements.⁵ That threshold applies to fiscal years beginning on or after October 1, 2024.

When You Can Skip the Full Plan: The De Minimis Rate

Not every recipient needs to go through the full process. Under 2 CFR 200.414(f), any recipient or subrecipient that has never had a federally negotiated indirect cost rate can elect a de minimis rate of up to 15 percent of modified total direct costs.⁶ The organization picks the appropriate percentage up to that ceiling, and federal agencies cannot force a lower rate unless a specific statute requires it.

The appeal is simplicity. The de minimis rate requires no supporting documentation, no negotiation with a cognizant agency, and no annual resubmission. Once elected, it applies to all federal awards until the organization decides to pursue a negotiated rate. The trade-off: organizations with actual indirect cost rates above 15 percent leave money on the table. For small nonprofits or local governments with modest federal funding, the administrative savings often make the de minimis rate the right call anyway.

Two constraints matter. Costs must be consistently charged as either direct or indirect; you cannot claim the same expense both ways. And the de minimis rate does not apply to cost-reimbursement contracts issued directly by the federal government under the Federal Acquisition Regulation.⁶

What Costs Can Go Into the Plan

Every cost charged to a federal award has to clear two hurdles before you allocate it anywhere: it must be allowable, and it must be allocable.

Allowability

Under 2 CFR 200.403, a cost is allowable only if it meets all of the following:⁷

Necessary and reasonable for performance of the federal award.
Within any caps or exclusions in the regulations or the specific award terms.
Treated consistently across federally funded and non-federally funded activities. A cost cannot be direct on one grant and indirect on another when the circumstances are identical.
Compliant with generally accepted accounting principles.
Adequately documented.
Not double-counted by being charged to one federal award and also used to meet cost-sharing requirements on another.

Allocability

A cost is allocable to a federal award if the program actually benefits from it. Under 2 CFR 200.405, the cost must satisfy at least one of three tests: it was incurred specifically for the award; it benefits both the award and other work and can be split proportionally using reasonable methods; or it supports the organization’s overall operations and can be partially assigned to the award.⁸ You cannot shift a cost from one federal award to another to cover a shortfall or dodge a restriction.

Always Unallowable

Certain categories can never appear in the plan, regardless of how reasonable they might look:⁹

Alcoholic beverages.
Bad debts from uncollectible accounts.
Donations and contributions made by the organization.
Entertainment costs, including tickets, social events, and associated meals and lodging.
Fines and penalties resulting from legal violations.
Fundraising and investment management costs.
Goods or services for personal use by employees.
Lobbying expenses aimed at influencing legislation.

Auditors look for these items first. Including an unallowable cost, even by accident, can lead to disallowance of the entire cost pool if it appears the organization was not screening expenses properly.

Records You Need Before You Draft

The foundation is the previous fiscal year’s general ledger and trial balance, backed by audited financial statements where available. Every dollar of shared expense needs a paper trail.

Organizational charts matter almost as much. They show the relationship between central service departments and the operating programs they support, and reviewers use them to verify that the cost pools in the plan match the actual structure of the organization. If the chart says IT serves five program offices, the plan has to explain how IT costs flow to each one.

Personnel costs usually make up the largest share of indirect expenses. You need salary structures, fringe benefit rates, and records showing how employees divide their time across programs. Under 2 CFR 200.430, charges to federal awards for salaries must be supported by records that accurately reflect the work performed, cover all of the employee’s compensated activities, and be incorporated into the organization’s official records.⁹

Space-related costs (rent, utilities, building maintenance) need physical documentation. Floor plans with square footage for each department establish the basis for distributing facility costs. If two programs share a building but occupy different amounts of space, the allocation has to reflect actual usage.

Equipment depreciation requires schedules showing the acquisition date, cost, and useful life of each significant asset. Under 2 CFR 200.436, depreciation is computed from actual acquisition cost, with federally donated assets and land excluded from the calculation.⁹ Donated assets can use fair market value at the time of donation, but you cannot depreciate a donated asset and also count it as a matching contribution.

Drafting the Plan

The plan has two main parts: a narrative and a set of numerical schedules. The narrative describes each shared cost pool, explains why those costs are shared, and identifies the allocation base used to distribute them. Common allocation bases include total direct labor hours, the number of transactions processed, square footage occupied, or total direct costs. The choice matters because it decides how much of the shared cost each program absorbs.

Appendix IV to Part 200 gives nonprofits three recognized methods.² The simplified method works when all major functions benefit from indirect costs to roughly the same degree; the organization separates total costs into direct and indirect categories and divides indirect costs by an equitable base. The multiple-base method groups indirect costs into separate pools and allocates each using the base that best measures relative benefit. The direct allocation method treats nearly everything as a direct cost except general administration, prorating shared items like depreciation, rent, and IT individually to each program.

Every plan needs a signed certification. For governmental units, Appendix V requires a Certificate of Cost Allocation Plan in which the signing official attests that all included costs are allowable, that costs are allocated based on actual benefit to the federal awards, and that no cost has been claimed as both direct and indirect.¹⁰ For nonprofits, Appendix IV requires a Certificate of Indirect Costs signed by someone at or above the level of vice president or chief financial officer. These certifications carry legal weight; signing one while knowing the figures are wrong can lead to fraud charges.

Accuracy at this stage is essential because errors in the allocation base compound through every downstream calculation. If the base overstates one program’s share, every billing cycle built on that rate will overcharge the federal award.

The Rate Types You May Be Assigned

When the cognizant agency approves the plan, it assigns a rate type. The type determines how adjustments are handled when actual costs differ from estimates.

Provisional rate: a temporary rate used for billing and reimbursement until actual cost data becomes available. It gets replaced by a final rate once the period closes and the numbers are audited.
Final rate: based on actual allowable costs for a completed period. Once established, it is not subject to further adjustment.
Predetermined rate: set in advance for a current or future period based on estimated costs. It is firm and generally will not change, even if actual costs differ. Predetermined rates can be used on grants and cooperative agreements but not on federal contracts.
Fixed rate with carry-forward: like a predetermined rate, except the difference between estimated and actual costs carries forward as an adjustment to a later period’s rate calculation.

Most organizations start with a provisional rate and move to a final rate after audit. Fixed-with-carry-forward is popular because it avoids year-end surprises while still reconciling to actual costs over time.

Submitting, Negotiating, and Receiving a NICRA

Finished plans go to the cognizant agency.³ Deadlines depend on the type of entity and the type of plan:

Central service cost allocation plans (state and local governments) must be submitted within six months before the beginning of the fiscal year in which the government proposes to claim central service costs.¹¹
Nonprofit indirect cost proposals are due within six months after the close of each fiscal year for organizations that already have an established rate.²

After the agency receives the plan, federal auditors review it for compliance. Expect a negotiation phase in which auditors question specific line items, challenge allocation bases, or flag unallowable costs. Complex governmental units with dozens of central service departments can spend several months in this back-and-forth.

When the agency approves the plan, it issues a Negotiated Indirect Cost Rate Agreement, known as a NICRA. The NICRA specifies the approved rate, the base it applies to, and the period it covers.⁹ It is the organization’s authorization to charge indirect costs to federal awards at the stated rate. Without it, the organization either falls back to the de minimis rate or cannot recover indirect costs at all.

After Approval: Records and Renewals

Approval does not end the work. Under 2 CFR 200.334, records supporting the federal award must be retained for at least three years from the date the final financial report is submitted.¹² For awards renewed quarterly or annually, the three-year clock starts from the date of each report. Many organizations retain records longer because audits or disputes can extend the relevant period.

The plan itself needs annual updating. Indirect cost rates are approved for specific periods, and new proposals must be submitted before each rate period expires. Letting a rate lapse leaves the organization unable to recover shared costs from ongoing federal awards, which can create serious cash-flow problems for entities that depend on indirect cost reimbursement to fund their central operations.

State-funded grants add another layer. Many state agencies cap indirect cost reimbursement at rates lower than the federally negotiated rate, often in the range of 10 to 15 percent regardless of what the NICRA says. The federal rate still applies to federal awards, but any organization managing a mix of federal and state funding has to track which rate applies to each grant.

What Happens If You Fall Out of Compliance

When the cognizant agency finds that an organization has failed to maintain a compliant plan and additional conditions will not fix it, 2 CFR 200.339 authorizes several escalating remedies:¹³

Withholding payments until the organization takes corrective action.
Disallowing costs for all or part of the activity tied to the noncompliance.
Suspending or terminating the federal award in part or entirely.
Initiating debarment proceedings under 2 CFR Part 180, which can bar the organization from receiving future federal funds.
Withholding new awards or continuation funding for the project or program.

Cost disallowance is the most common enforcement action. An auditor identifies expenses that were improperly allocated or categorized as indirect when they should have been direct, and the organization must repay the federal government for the difference. For organizations running on thin margins, even a modest disallowance can force difficult budget cuts. Debarment is reserved for the most serious violations, typically involving intentional misrepresentation, though the reputational damage from any noncompliance finding can complicate future grant applications for years.

1
eCFR. 2 CFR 200.416 – Cost Allocation Plans and Indirect Cost Proposals
2
eCFR. Appendix IV to Part 200 – Indirect (F and A) Costs Identification and Assignment, and Rate Determination for Nonprofit Organizations
3
eCFR. 2 CFR Part 200 – Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards
4
U.S. Department of Health and Human Services. Cost Allocation Services
5
U.S. Department of Health and Human Services Office of Inspector General. Single Audits FAQs
6
eCFR. 2 CFR 200.414 – Indirect (F and A) Costs
7
eCFR. 2 CFR 200.403 – Factors Affecting Allowability of Costs
8
eCFR. 2 CFR 200.405 – Allocable Costs
9
eCFR. 2 CFR Part 200 Subpart E – Cost Principles
10
Cornell Law Institute. 2 CFR Appendix V to Part 200 – State/Local Governmentwide Central Service Cost Allocation Plans
11
eCFR. Appendix V to Part 200 – State/Local Governmentwide Central Service Cost Allocation Plans
12
eCFR. 2 CFR 200.334 – Record Retention Requirements
13
eCFR. 2 CFR 200.339 – Remedies for Noncompliance