Grant money can be used for the specific costs that advance the funded project and that the award agreement approves: staff pay and benefits, supplies, travel, equipment, participant stipends, overhead, and in some cases construction or general operations. What grants can be used for is defined by the award terms and, for federal awards, by the cost principles in 2 CFR Part 200, which also flat-out prohibit certain expenses no matter what. Spending that falls outside those rules becomes a disallowed cost the recipient has to repay from its own money.
The categories below walk through what qualifies, what doesn’t, and the compliance rules that decide the difference.
The Four Tests Every Expense Has To Pass
Before any cost gets charged to a federal grant, it has to clear four checks. The expense must be necessary and reasonable for carrying out the grant’s objectives. It must be allocable to the award, meaning it directly benefits the funded project rather than some unrelated activity. It must be treated consistently, so you cannot call something a direct cost on one grant and an indirect cost on another. And it must conform to any spending limits in the award terms or in the Uniform Guidance.
These tests apply across every category that follows. A cost that is perfectly fine on one grant can be unallowable on another if the award terms restrict it or if the expense doesn’t advance that particular project’s goals.
Personnel, Supplies, Travel, and Other Direct Costs
Direct costs are the expenses tied specifically to the work in your grant proposal. For most awards, personnel costs are the largest share: gross salaries and fringe benefits for staff who perform project tasks. If an employee splits time between a grant-funded project and other work, only the portion spent on the grant may be charged to it. Federal rules require records that accurately reflect the work performed, backed by internal controls that give reasonable assurance the charges are correct and properly allocated.
Supplies qualify too — laboratory materials, educational handbooks, software licenses — along with travel for field research, site visits, or presenting findings at professional conferences. Every charge needs supporting documentation: receipts, travel authorizations, mileage logs. Auditors have to be able to trace a clear link between the expense and the project’s objectives. If they cannot, the cost gets disallowed and the recipient owes the money back.
Participant Support Costs
Many grants also pay costs on behalf of people who take part in a training program or conference but don’t work for the recipient organization. These participant support costs include stipends, travel allowances, housing and meal allowances, registration fees, and training materials. Honoraria and travel for guest speakers do not count as participant support and have to be budgeted separately. Participant support funds generally cannot be moved to other budget categories without prior written approval from the awarding agency.
Equipment and Capital Projects
Some grants fund long-term assets — purchasing land, constructing facilities, or extensively renovating existing structures. Federal regulations define “equipment” as tangible personal property with a useful life of more than one year and a per-unit cost of $10,000 or more. That threshold was raised from the previous $5,000 figure on October 1, 2024.
Recipients have to keep a detailed inventory of all equipment acquired with grant funds, including serial numbers, acquisition dates, and physical locations. The grantor often retains a reversionary interest in those items during the award period, which means if the organization stops using the asset for its intended purpose, the grantor can require it to be sold or the current market value returned.
Construction projects funded by federal grants frequently trigger the Davis-Bacon Act, which requires contractors and subcontractors to pay laborers and mechanics at least the locally prevailing wage and fringe benefits. The requirement applies to federal or federally assisted construction contracts exceeding $2,000. Infrastructure projects also face domestic sourcing rules under the Build America, Buy America Act, which requires all iron, steel, manufactured products, and construction materials used in federally funded projects to be produced in the United States.
Overhead and Indirect Costs
Organizations incur costs that support the whole entity rather than a single project: rent, utilities, general accounting, legal counsel, human resources. Because these expenses benefit every program under the organization’s roof, they count as indirect costs and get recovered through a set percentage rather than billed line by line.
Many recipients negotiate a formal indirect cost rate with their cognizant federal agency, documented in a Negotiated Indirect Cost Rate Agreement. Organizations without a negotiated rate can instead elect a de minimis rate of up to 15 percent of modified total direct costs — a simplified option that requires no supporting documentation to justify the percentage chosen. The 15-percent ceiling took effect October 1, 2024, replacing the previous 10-percent rate. Once an organization elects the de minimis rate, it has to use that rate on all federal awards until it obtains a negotiated rate.
Whichever method the organization uses, no single expense may be charged as both a direct and an indirect cost on the same award.
Capacity Building and General Operating Support
Not every grant funds a specific public-facing service. Capacity-building awards cover professional development and specialized training for existing staff, strategic planning sessions led by outside consultants, governance training for board members, and technology upgrades like donor management software or data reporting systems. Reporting focuses on organizational growth and the completion of internal milestones rather than program outputs.
General operating support, sometimes called unrestricted or core funding, gives recipients the broadest flexibility. It can go toward any expense that furthers the organization’s mission — filling budget gaps, hiring new staff, responding to emergencies. The organization still has to show that funds supported activities consistent with its tax-exempt purpose or corporate charter, and no portion may be diverted for personal gain or activities outside the approved mission. Organizations often use operating support to provide the matching funds that certain government grants require.
Matching and Cost-Sharing Contributions
Some grants require the recipient to put up its own resources — cash or in-kind — toward the project. Matching funds have to meet the same standards as any other grant expenditure: verifiable in the organization’s records, necessary and reasonable, and not already counted as a match on another federal award.
Volunteer labor is one of the most common in-kind matches. When volunteers provide professional or technical services, the value has to match the rate the organization pays its own employees for similar work. If the organization doesn’t employ anyone with those skills, the rate should reflect what similar workers earn in the local labor market. Donated property counts at fair market value on the date of donation, and donated office space counts at the fair rental value of comparable space established by an independent appraisal.
What Grants Cannot Be Used For
Federal cost principles flatly prohibit several categories of spending on any federal award, regardless of what the grant agreement says. Alcoholic beverages are always unallowable. Entertainment costs — amusement, social activities, gifts — are unallowable unless the award specifically authorizes them for a direct programmatic purpose. Fundraising expenses, including campaigns, endowment drives, and donor solicitations, are unallowable, though fundraising that directly meets the federal program’s objectives may be allowed with prior written agency approval.
Lobbying is unallowable: no cash or in-kind contributions to political campaigns, no communications urging the public to contact legislators, no attempts to improperly influence executive branch employees regarding a federal award. When lobbying costs are part of an organization’s indirect cost pool, they have to be separately identified in the indirect cost rate proposal and excluded from the reimbursable total.
Fines and penalties from violations of federal, state, or local law are unallowable. So are goods or services bought for an employee’s personal benefit, regardless of whether reported as taxable income. Bad debts — uncollectable accounts and related collection or legal costs — are unallowable. Interest on borrowed funds is generally unallowable, with a narrow exception for certain financing costs to acquire or construct capital assets under specific conditions.
Spending Rules That Trip People Up
Even an allowable cost can become a problem if the recipient skips a procedural step. Several rules commonly catch grant recipients off guard.
Prior approval. Certain costs and changes require written approval from the federal agency before you incur them, including capital equipment purchases, pre-award spending, rearrangement and reconversion costs, foreign travel, and participant support reallocations. Spending without the required approval doesn’t automatically make the cost unallowable, but it sharply raises the risk of a disallowance finding at audit.
Budget transfers. If cumulative transfers between approved budget categories exceed 10 percent of the total award budget (including any cost share), you need prior approval before moving the funds. Splitting a purchase across budget lines to stay under the threshold is not permitted.
Period of performance. Grant funds can only cover costs incurred between the award’s start date and end date. Expenses before the start or after the end are generally unallowable unless the agency has approved pre-award spending or a no-cost extension. Many federal awards let the recipient initiate a one-time extension of up to 12 months on its own, provided the agency receives written notice with supporting justification at least 10 calendar days before the current end date. The extension cannot be used solely to spend down leftover balances. Any further extensions require formal prior approval.
Procurement thresholds. Buying goods and services with grant funds triggers competition requirements. Micro-purchases up to $15,000 can be made without competitive quotes, as long as the price is reasonable. Small purchases from $15,001 to $349,999 use simplified acquisition procedures, with price or rate quotes from an adequate number of qualified sources. Purchases of $350,000 and above require full and open competition with formal sealed bids or competitive proposals. Splitting a procurement into smaller pieces to dodge a higher threshold is prohibited. Sole-source contracts are allowed only in narrow circumstances, such as when an item is available from a single supplier or when solicited competition proved inadequate.
Every grant recipient also has to maintain a written conflict-of-interest policy covering employees, officers, agents, and board members involved in procurement decisions. No one with a financial or personal interest in a potential contractor may participate in selecting, awarding, or administering that contract. The policy has to prohibit employees from accepting gratuities or favors from contractors and spell out disciplinary consequences for violations.
What Happens When Grant Funds Are Misspent
Compliance failures carry consequences that run from repayment demands to criminal prosecution, depending on how serious the violation is.
The most common enforcement action is a disallowed-cost finding during an audit. When an auditor or agency determines an expense wasn’t allowable, the recipient has to repay that amount from non-grant funds, either as a direct payment or as a reduction in future grant disbursements.
More serious violations — fraud, embezzlement, false statements, bribery, or a pattern of failure to perform — can lead to suspension or debarment. A suspended or debarred organization is listed as ineligible in SAM.gov, which bars it from receiving federal awards or subcontracts across the entire executive branch. The exclusion applies to both procurement and grant programs, and federal contractors generally may not award subcontracts of $30,000 or more to a debarred entity.
Submitting false claims for grant reimbursement triggers liability under the False Claims Act. Civil penalties currently range from $14,308 to $28,619 per false claim, plus damages of up to three times the amount the government lost. On the criminal side, knowingly presenting a false claim to the federal government carries up to five years in prison under 18 U.S.C. 287, and making false statements in connection with a federal matter carries up to eight years under 18 U.S.C. 1001. Even unsuccessful applicants can face penalties if information in their application turns out to be false or fraudulent.