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Cost Review Guidance


SUBJECT: Cost Review Guidance

FROM: Bruce M. Feldman, Acting Director
Grants Administration Division

TO: Senior Resource Officials

The Cost Review Guidance has been developed over the last two years as the result of self-evaluations conducted by GAD, Program Offices, and Regional Grants Management Offices (GMOs). A common finding of these evaluations was the need for guidance in conducting cost reviews of budgets submitted with applications for Federal assistance. Accordingly, the Cost Review Guidance establishes uniform procedures and instruction for reviewing and evaluating proposed costs included in assistance applicants’ budgets. The Guidance provides procedures to be conducted in accordance with the applicable Office of Management and Budget (OMB) Cost Principles. It also establishes minimum procedures that should be undertaken in conducting a cost review, and allows the Program Offices and GMOs flexibility in conducting additional review procedures.

The Guidance was written with the active participation of GAD’s management. GAD has distributed draft versions of the Guidance to the Grants Customer Relations Council (GCRC). GAD received and considered written comments from various GCRC members. The Cost Review Guidance was also discussed at the Grants Management Offices (GMOs) Technical Conference, which resulted in additional suggestions for improving the Guidance. GAD has considered all input from the GCRC and the GMOs and incorporated it, as feasible, in the revised version of the Guidance (attached).

If you have questions regarding the Cost Review Guidance, please contact Bill Kinser at (202) 564-xxxx.


cc: GCRC


I. Background The Agency’s Management Effectiveness Reviews (MERs) have indicated a need for guidance in conducting cost reviews of budgets submitted with applications for Federal assistance (that is, grants and cooperative agreements). A cost review is defined as a review of a budget to ensure that costs are necessary, reasonable, allowable, allocable, and adequately supported.

II. Purpose The purpose of this document is to establish uniform procedures and guidance for reviewing and evaluating proposed costs included in assistance applicants’ budgets. This Guidance provides procedures to be conducted in accordance with the applicable Office of Management and Budget (OMB) Cost Principles. The Guidance does not limit the flexibility of the Program Offices or Grants Management Offices (GMOs) in conducting additional analysis; rather, it provides minimum procedures that should be undertaken in conducting a cost review.

III. Applicability This Guidance should be applied to all grants and cooperative agreements, except those that are subject to the provisions of the Implementation Order to Streamline Small Grants (Classification Number: 5700.2; Approval Date: September 1, 1998). See the Implementation Order’s section entitled “Applicability.”

IV. References The four sets of cost principles applicable to EPA assistance awards:

(1) OMB Circular A-122, Cost Principles for Nonprofit Organizations.
(2) OMB Circular A-87, Cost Principles for State, Local, and Indian Tribal Governments.
(3) OMB Circular A-21, Cost Principles for Educational Institutions.
(4) Federal Acquisition Regulation (FAR) Subpart 31.2, Contracts with Commercial Organizations, codified at 48 CFR 31.2.

OMB Circulars A-122, A-87, and A-21 are available on OMB’s Grants Management Home Page at the following Internet address: http://www.whitehouse.gov/omb/grants/index.html EPA Disclaimer

The FAR is available on the FAR Web Site at the following Internet address: http://www.arnet.gov/far/EPA Disclaimer

Managing Your Financial Assistance Agreement.

V. Policy It is EPA policy that a cost review be conducted for every project selected for funding. The form and extent of the cost review will be based on the individual grantee and project. Details regarding the reviews conducted should be documented, regardless of the complexity and depth of the review. Included as an attachment to this Guidance, is a “Guide to Cost Reviews.” While the use of this Guide is suggestive, it is intended to serve as an additional tool in conducting a cost review.

VI. Documenting Document assistance agreement files in accordance with the provisions of the Grants Procedures Management Fact Sheets For Agency Leaders: Number 10: Assistance Agreement File Documentation (Reference Number: GPI-98-5; Approval Date: May 1, 1998).
Additionally, both the GMOs and Program Offices should do the following when
documenting cost reviews:

(1) Detail the extent and findings of cost reviews. Document all cost reviews performed even if the evaluation found no questionable areas.
(2) Indicate budget revisions and clearly label revised budgets to differentiate them from the initial budgets.
(3) If completed, include the “Guide to Cost Reviews” in the assistance agreement file.

VII. GMO The following are steps the GMOs should follow in performing a cost review:


(1) Verify that budget detail agrees with the budget summary, and that figures add up correctly.
(2) Ensure the budget information is complete and that costs are allowable and allocable in accordance with Federal cost principles.
(3) Require revisions of budgets that include costs that are not reasonable, allowable, allocable, or necessary.
(4) Apply the provisions of the “EPA Indirect Cost and Special Rate Policy for Grants and Cooperative Agreements Awarded to Non-Profit Organizations and Educational Institutions,” or the “EPA Indirect Cost and Special Rate Policy for Grants and Cooperative Agreements Awarded to States and Local Governments,” as applicable.

VII. Program Office The following are steps Project Officers should follow in performing a cost review:


(1) Compare the proposed budget to the narrative or work plan to determine whether the budget is reasonable from a programmatic perspective.
(2) Examine staffing requirements for the project and determine
whether the proposed number of personnel is appropriate and the right mix to meet the project objectives.
(3) Review personnel budget category to determine if the salary ranges proposed are reasonable.
(4) Determine whether the amount budgeted for supplies is reasonable.
(5) Review travel costs to ensure that the destination(s) and the number of trips planned are necessary to complete the scope of work, and that the number of travelers is consistent with the trips’ purposes.
(6) Determine whether the project’s objectives support equipment purchases or if other options should be considered, such as equipment rental or loan of government property. If purchasing equipment is the best option, consider what will happen to the equipment after it is no longer needed for the project or the project is terminated. If the recipient is not going to be allowed to keep the equipment, instruct the GMO to add an appropriate disposition term and condition to the assistance award.
(7) Review the “other” cost category to determine whether these costs are consistent with the proposed work plan and are necessary to complete the approved work plan.
(8) Review the purpose of proposed contracts under the grant to verify that

(a) the contract support appears necessary to carry out the objectives of the project/program; and
(b) the proposed costs appear reasonable.

(9) Determine whether the grantee will generate program income under the grant. If so, refer to 40 CFR §30.24, or 40 CFR §31.25, as appropriate, to determine how the recipient should handle program income. If the Program Office wishes for the recipient to handle program income differently than prescribed in 40 CFR §30.24(d), or wishes to authorize the program income alternatives described in 40 CFR §31.25(g), then the Project Officer is to include in his or her decision memorandum to the GMO the applicable term and condition to be included in the assistance agreement.
(10) Ensure that no unallowable costs, such as lobbying, entertainment expenses, etc., are included.

IX. Contact Point William G. Hedling, Acting Chief, Policy, Information and Training Branch, Grants Administration Division, (202) 564-5325.

The “Guide to Cost Reviews” is being provided as an attachment to the Cost Review Guidance. This document is not required to be completed; rather it should be used as a tool in conducting cost reviews of assistance applicants’ budgets.


1. Personnel Costs. Personnel costs are those costs for labor effort directly related to the grant program/project.

EXAMPLE: Category Estimated X Hours Hourly Rate = Cost Total
Professional 100 $14.00 $1,400
Nonprofessional 1,000 $7.00 $7,000
Clerical 800 $5.00 $4,000
Total Direct Personnel Cost $12,400


(1) The level of effort or the total amount of time proposed. The proposed effort should be consistent with the effort required by the work plan.

(2) The labor mix or the labor categories proposed. Labor mix should be consistent with the caliber of effort – professional/nonprofessional/clerical – required by the grant work plan.

(3) The current salary plus a reasonable escalation factor during the program/project. Generally, the conversion of annual salaries into hourly rates is accomplished by dividing the annual salary by 2,080 hours assuming an eight hour work day.

2. Fringe Benefits. Fringe benefit costs are those costs for personnel employment other than the employees’ direct income (i.e., employer’s portion of FICA insurance, retirement, sick leave, holiday pay, and vacation cost) paid by the assistance applicant. While these costs are normally accumulated in a pool and allocated using percentages as shown in the following example, an assistance applicant may calculate actual fringe benefit costs for the employees identified in the work plan. Either method is acceptable if applied consistently.

EXAMPLE:Category Category X
Rate Direct Labor Base = Cost Total
Professional 12% $1,400 $168
Nonprofessional 10% $7,000 $700
Clerical 10% $4,000 $400
Total Fringe Benefit Cost $1,268


(1) The direct labor base applied to the fringe benefit rate. The base should correspond to the cost of the proposed labor categories contained in the work plan.

(2) The rate assigned to each category. The fringe benefit rate may be higher for senior employees because of greater benefits given those employees.

(3) If costs for specific employees are computed, employer’s FICA insurance and unemployment insurance are applied only up to the maximum salary limits established by statute.

3. Indirect. Indirect costs result from allocation of a grouping of administrative costs which are not easily identified as a direct cost. These costs are identified and contained in the assistance applicants’ Negotiated Indirect Cost Agreement. An assistance applicant may not be approved for more indirect costs than what is approved by the Negotiated Indirect Cost Agreement, however, in some instances, a lesser rate may be requested by the assistance applicant and approved by EPA. For additional guidance, refer to the “EPA Indirect Cost and Special Rate Policy for Grants and Cooperative Agreements Awarded to Non-Profit Organizations and Educational Institutions,” or the “EPA Indirect Cost and Special Rate Policy for Grants and Cooperative Agreements Awarded to States and Local Governments,” as applicable.

EXAMPLE:Negotiated Rate X Base = Cost Total
50% $13,668 $6,834
Total Indirect Cost $6,834

4. Travel and Per Diem. Travel and per diem costs are those costs for travel and subsistence which are directly related to the grant.

Destination Number of X
Trips Cost per Trip = Cost Total
Inspections 100 $10 $1,000

Training 20 $800 $16,000
Per Diem
Number of X
Days Rate per Day = Cost
10 $35.00 $350
Total Travel and Per Diem Cost $17,350


(1) The type of trip to be made.

(2) The number of trips to be made. Often one trip will include a team of two or more persons.

(3) The cost per trip (per mile for local travel).

(4) The rate of per diem allowance.

5. Equipment, Materials, and Supplies. Equipment, material, and supply costs are those costs directly related to the grant.

EXAMPLE:Item Quantity X Cost per Item = Cost Total
Recording Barometers 5 $455 $2,275
Lysimeter Output Units 10 $637 $6,370
Shed Material $950
Misc. Supplies $580
Total Equipment, Materials, & Supplies $10,175


(1) The total cost of unitemized equipment, material, and supplies. Items of equipment that exceed a total cost of $5,000 per unit and a useful life of more than one year must be itemized.

(2) The need for the itemized equipment. Is the equipment intended to be used to solely support the program/project to which it is to be funded or is it intended to support more than one program/project? If it is intended to be used to support more than one project/program only the portion of costs which are allocable to your project/program is allowable to be charged to the grant.

(3) The cost of rental vs. the cost of purchase. Would it be more economical to rent the item than to purchase it?

(4) Ratio of employees to the authorized equipment. (i.e., Are we approving sixteen computers when the assistance applicant only has twelve employees who are working on the program/project?)

(5) Have we authorized this same equipment for this project/program in past years (i.e., have we approved the purchase of an automobile every year for the past twelve years?)

(6) Disposition of equipment authorized in the assistance agreement. If you approve the purchase of equipment, does EPA want the right to retain title at the end of the project or will the equipment be retained by the assistance applicant.

6. Contractual Services. Contractual services are those services directly related to the EPA program/project. The procedures for cost review for these services are the same as for applications except that profit considerations are included.

EXAMPLE: Price Total
Contract #1 $100,000
Contract #2 $200,000
Consultant Service
Daily Rate X No. of Days = Cost
$150 10 $1,500
Total Contractual Services $301,500


1. The cost and profit summary or price comparison summary of each contract.

2. The hourly/daily rate and the number of hours/days proposed for consultant services.

7. ANALYZING THE RESULTS. After a review of the 1 through 6 of the cost elements, divide your findings into three separate categories. These categories are as follow:

a. COSTS ACCEPTED. These costs are considered reasonable as submitted, and are included in program/project costs without objection. This recommendation is usually qualified to the extent that costs may be questioned as a result of a technical evaluation of the quality and quantity of the direct labor, materials, equipment, and other direct costs proposed.

b. COSTS QUESTIONED. These costs are costs which are seriously questioned as being unreasonable and should be reduced from the program/project cost. These costs should be documented for the official file. Costs in this category should include costs which are prohibited by the Cost Principles applicable to the assistance applicant (i.e., OMB Circular A-87 (State and Local Governments), A-21 (Educational Institutions), and A-122 (Non-Profit Organizations). A few examples are as follows:

1. Bad Debts. This includes any losses arising from uncollectable accounts and other claims and related costs.
2. Entertainment. Costs of amusements, social activities and incidental costs thereto such as meals, beverages, etc., are included.
3. Fines and Penalties. Costs resulting from violations of, or failure to comply with Federal, State and local laws and regulations.
4. Legislative expenses. Salaries and other expenses of the State legislature or similar local governmental bodies such as county supervisors, city councils, school boards, etc., whether incurred for purposes of legislation or executive direction.

c. COSTS SET-ASIDE. These costs are costs in which a final determination cannot be made on their eligibility without further information being received from the assistance applicant. These costs should not be included in the assistance award until resolved or unless a condition is added to the award that limits reimbursement until resolution is reached.

CONCLUSION: The results of the cost review will help determine the amount of assistance provided to assistance recipients. This information should be retained by the project officer in the official program file as documentation for the basis of the award amount.

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