TLDR
A nonprofit cost allocation plan is the written methodology that explains how shared costs — rent, utilities, executive director salary, accounting — are split across federal grants, programs, and unrestricted operations. Under 2 CFR 200.405, every cost charged to a federal award must be either directly attributable or allocable through a written, consistently applied plan. Auditors don't reject allocation methodologies for being imperfect; they reject them for being unwritten, inconsistent, or unsupported by documentation. A plan you can defend is a plan you wrote down before the audit and applied every month.
A nonprofit running three federal grants and four foundation grants in the same building, with the same executive director, the same accountant, and the same shared infrastructure, has to answer one question every single month: how do we split the costs that don’t belong to a single grant? The answer cannot be “we’ll figure it out at audit time.” The answer has to be a written plan that was approved before the costs were incurred, applied consistently throughout the year, and documented well enough that the auditor can trace any single dollar back to the methodology that put it there. That document is the cost allocation plan. Building one well is harder than it sounds, and rebuilding one in a hurry during single-audit fieldwork is a recipe for findings.
This guide is for development directors, executive directors, and finance leads at mid-sized nonprofits operating under 2 CFR 200 — federal grantees and pass-through grantees. The mechanics translate to non-federal grants too, but the audit teeth are federal.
What a cost allocation plan does
Some costs are direct: a program manager whose entire job is running a single federal grant program is a direct cost of that grant. Her salary, her fringe benefits, her travel, her supplies are all directly attributable to one cost objective. Other costs are shared: the executive director’s salary, rent on the headquarters building, the accountant’s time, the IT infrastructure. These costs benefit multiple programs and grants simultaneously and cannot be assigned to one. They have to be allocated.
Allocation requires three things:
- Identification of the shared cost (the rent, the executive director’s salary, etc.)
- Selection of an allocation base — a measurable input that reflects how the cost benefits each cost objective
- Application of the base to produce a defensible split
The cost allocation plan documents all three for every shared cost the organization recognizes. It explains why each base was chosen, how the base is measured, and how the resulting split is recorded in the books.
Under 2 CFR 200.405, the standard for cost allocation is that costs charged to a federal award must be allocable to the award — meaning the cost benefits both the award and other work, and is distributed in reasonable proportion to the benefits received. The phrase “reasonable proportion” is doing a lot of work. The cost allocation plan is the document that explains what reasonable means in your specific operation. Read alongside the 2 CFR 200 Subpart E cost principles guide for the underlying regulatory framework.
The four most common shared costs and the bases that work
Rent and occupancy
Standard base: Square footage occupied by each program
Documentation needed: A floor plan with square footage per workspace; a written assignment of each workspace to a program; quarterly or annual updates if assignments change
Common error: Allocating rent based on staff headcount rather than square footage. Headcount works only if every staff member uses the same amount of space, which is rarely true. Square footage is the standard because it’s measurable, stable, and defensible.
For shared common areas (conference rooms, kitchens, hallways), the standard treatment is to exclude them from the base and allocate them across programs proportional to assigned square footage. The plan should make this treatment explicit.
Executive and administrative salaries
Standard base: Time and effort across programs, captured in time records
Documentation needed: Time and effort certifications under 2 CFR 200.430(i), at minimum monthly for staff working on multiple federal awards or multiple cost objectives
The 2 CFR 200.430(i) requirements have specific elements: the time records must reflect actual activity, must encompass all activities for which the employee is compensated, and must be supported by a system of internal controls that provides reasonable assurance the charges are accurate. After-the-fact estimates do not meet this standard. Auditors will sample time records and reconcile to payroll allocations.
For an executive director who genuinely splits time across multiple programs, the time and effort record should show the actual split, the books should record salary expense in those proportions, and the cost allocation plan should describe the time tracking method. If the ED’s time genuinely doesn’t vary materially across periods, an annual time study with quarterly reaffirmations is acceptable in some cases — but the plan must say so explicitly and the methodology must be approved.
Accounting and finance
Standard base: Number of transactions, hours of effort, or modified total direct cost
Documentation needed: Transaction logs, time records, or the basis of the allocation percentage
A bookkeeper supporting all programs can be allocated based on transactions processed per program (if the system tracks it cleanly), hours logged per program, or — more commonly in smaller organizations — a percentage based on a periodic effort study reviewed at least annually.
IT, communications, and other shared infrastructure
Standard base: Full-time equivalents (FTEs) per program or modified total direct cost
Documentation needed: FTE counts per program by period; the basis for allocation choice
FTE-based allocation is the workhorse for shared infrastructure costs. It assumes each FTE consumes roughly the same level of IT, phone, and infrastructure support. The plan should note the assumption and identify any exceptions.
The de minimis rate decision
Organizations that don’t have a federally-negotiated indirect cost rate agreement (NICRA) have an alternative under 2 CFR 200.414(f): the 10% de minimis rate. They can charge a flat 10% of modified total direct cost (MTDC) as indirect cost recovery on federal awards, without the cost and effort of negotiating a NICRA.
The de minimis rate doesn’t replace a cost allocation plan — it sits on top of one. The plan still needs to identify what is direct and what is indirect, document the allocation of shared direct costs across programs, and define MTDC. The 10% rate just means the organization isn’t computing its actual indirect cost rate; it’s accepting the federal default. We cover the NICRA route in detail in the cognizant agency for indirect costs guide.
For organizations under $5 million in federal funding, the de minimis rate is usually the right answer — the cost of negotiating a NICRA exceeds the recovery difference. Above that scale, an actual indirect cost rate often recovers more.
What goes into a written plan
A defensible cost allocation plan includes:
- Organizational overview — programs, grants, locations, staffing, and how the organization is structured operationally
- Cost categories — list of all shared costs the plan addresses
- Direct cost identification — which costs are direct to specific programs and how they are coded in the books
- Allocation base for each shared cost — with the rationale for choosing it
- Treatment of indirect costs — NICRA rate or de minimis 10%, with the MTDC base defined
- Time and effort methodology — how personnel time is captured and certified
- Periodic review schedule — when the plan is reviewed and by whom
- Approval — board or executive director signature and date
- Effective date and term — what fiscal year(s) the plan covers
- Reconciliation procedures — how the plan ties back to the financial statements
Most plans run 8–15 pages. A two-page plan is usually too thin to defend. A 50-page plan is usually overengineered. The right length is the length that clearly answers the auditor’s questions without burying them in detail.
For a starting structure, our cost allocation plan worksheet walks through each section with prompts and example calculations, including allocation base templates for the four most common shared costs. It’s the document we hand finance leads who are starting from a blank page.
Consistency across funding sources
The single most-cited finding in cost allocation audits is inconsistent application: an organization charged rent to federal grants based on square footage but charged the same rent to a foundation grant based on a flat percentage. 2 CFR 200.405(b) requires that costs be allocated in accordance with the relative benefits received, and 2 CFR 200.403(d) requires that costs be treated consistently. Different methodologies for different funders, applied to the same shared cost, are not allowed.
This trips up organizations that are trying to maximize recovery. Charging foundation grants a higher overhead percentage than federal grants — because the foundation’s policy permits it — does not survive scrutiny if the methodology contradicts the federal allocation. The right path is one consistent methodology, applied across all funding sources, with the rate of recovery limited by what each funder permits.
What the auditor will test
In a single audit, the auditor will sample transactions charged to federal awards and trace each one back through the allocation plan to verify:
- The cost was allowable under 2 CFR 200 Subpart E and the award terms (see the allowable costs guide)
- The cost was allocable to the award per 2 CFR 200.405
- The allocation base was applied as described in the plan
- The methodology was consistent with how non-federal funds were treated
- Time and effort documentation supports any personnel allocations
A single inconsistency or missing record can become a finding. Multiple findings on cost allocation can cascade into a higher-risk classification in the next year’s risk assessment under 2 CFR 200.518, which means more testing and more scrutiny.
Building this into the monthly close
A cost allocation plan that lives only in a binder is a plan that won’t survive an audit. The plan has to be operationalized in the monthly close. That means:
- Allocation journal entries are posted every month, not at year-end
- Time and effort records are collected and reviewed monthly
- The bases (FTE counts, square footage, transaction volumes) are updated as they change
- The grant management or restricted fund tracking system mirrors the plan
If the plan says rent is allocated 40% to Federal Grant A, 30% to Federal Grant B, 20% to Foundation Grant C, and 10% to unrestricted, the monthly rent expense should hit the books with that split, not get reallocated at year-end. Auditors strongly prefer to see allocations happening in real time. We discuss the monthly mechanics in the practical guide to 2 CFR 200 uniform guidance.
When to update the plan
Annual review is the floor. Update sooner if any of these happen mid-year:
- A new federal award is received
- A program closes or a major program is added
- Staff allocation across programs changes materially
- Office space changes (new location, renovation, expansion)
- A new revenue source with different allocation requirements is added
- Audit findings recommend methodology changes
Document each update with an effective date, board or executive director approval, and a summary of what changed. The audit file should show the version of the plan that was in effect during each portion of the audit period.
A cost allocation plan that gets approved once and never reviewed becomes wrong before it becomes audited, and being wrong-and-audited is the worst-case scenario. Keeping the plan current is mostly procedural — fifteen minutes of review at the end of each quarter, two hours of update work in any quarter where something changed. The cost of that maintenance is far below the cost of a federal finding and the corrective action that follows.
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- Cost allocation plan
- A written document describing how a nonprofit assigns shared costs across programs, grants, and funding sources, including the allocation bases used and the rationale for each.
DEFINITION
- Allocation base
- The measurable input used to distribute a shared cost across cost objectives. Square footage allocates rent, FTEs allocate HR costs, modified total direct cost allocates indirect cost recovery.
DEFINITION
- Modified total direct cost (MTDC)
- Defined in 2 CFR 200.1 as direct salaries and wages, applicable fringe benefits, materials and supplies, services, travel, and the first $25,000 of each subaward. Excludes equipment, capital expenditures, charges for patient care, rental costs, tuition remission, and the portion of each subaward exceeding $25,000.
DEFINITION
- Time and effort certification
- Documentation required under 2 CFR 200.430(i) showing the actual percentage of an employee's time spent on each federal award and other activities, supporting the allocation of personnel costs.
DEFINITION
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