2 CFR 200 (Uniform Guidance): A Practical Guide for Nonprofit Operators

2 CFR Part 200 is the administrative backbone of federal grant compliance in the United States. Understanding what it requires — not at the regulatory citation level, but in terms of actual operational obligations — is essential for any nonprofit managing federal awards.

What Uniform Guidance Is and Why It Was Created

Before 2014, federal grant requirements were spread across multiple Office of Management and Budget circulars: A-21 for institutions of higher education, A-87 for state and local governments, A-122 for nonprofits, and A-133 for audit requirements. Each circular had slightly different rules, creating compliance complexity for organizations that received funds from multiple federal agencies.

The Uniform Guidance consolidated these into a single framework. Organizations that receive federal funds directly or as subrecipients now operate under one consistent set of rules regardless of which federal agency funded the award. The consolidation reduced some compliance burden and eliminated certain inconsistencies, but it also raised the bar on several requirements — notably time-and-effort documentation, subrecipient monitoring, and internal controls.

The current version includes amendments made in 2020 and reflects updates to the micro-purchase threshold, equipment management rules, and certain procurement requirements. If you are working from a compliance resource published before 2020, verify that it reflects the current thresholds.

The Three Cost Principles: Allowable, Allocable, Reasonable

Every expenditure charged to a federal grant must satisfy three independent criteria. Failing any one of them makes the cost unallowable, regardless of whether the other two criteria are met.

Allowable

A cost is allowable if it is:

• Authorized or not prohibited by the grant agreement
• Consistent with applicable laws, regulations, and grant terms
• Consistent with the organization’s written policies, applied consistently
• Not specifically listed as unallowable under 2 CFR Part 200.420-475

Appendix VI of the Uniform Guidance (for nonprofits) lists certain unallowable cost items specifically: entertainment costs, alcoholic beverages, costs for lobbying activities, fines and penalties, bad debt expenses, and fundraising costs, among others. These cannot be charged to federal grants under any circumstances, even if they are otherwise legitimate organizational expenditures.

Allocable

A cost is allocable to a grant if it benefits the grant’s program activities in proportion to what is charged. When a cost benefits only one grant program, 100% is allocable to that grant. When a cost benefits multiple programs — a program coordinator’s salary split across two grants, office rent that supports multiple programs — the cost must be allocated across all benefiting activities using a documented, reasonable, and consistently applied methodology.

The allocation methodology must produce results that reflect actual benefit. An organization cannot simply charge 50% of every shared cost to the largest federal grant because that is convenient. The methodology must be based on measurable factors: time worked, square footage, headcount, or another reasonable basis.

Reasonable

A cost is reasonable if the nature and amount are consistent with what a prudent person would incur for the same purpose under comparable circumstances. Reasonableness is evaluated based on market rates, organizational policies, and what is customary in the field. Paying $15,000 for a conference venue that could be hosted for $2,000 at a community center is an allowable type of cost (meetings and conferences are generally allowable) that would fail the reasonableness test.

Reasonableness is also assessed for compensation. Salaries charged to federal grants must be consistent with the organization’s established pay scale and with compensation for comparable positions in comparable organizations.

Indirect Cost Rates: The Practical Options

Indirect costs are organizational overhead costs that cannot be directly assigned to a single program — executive director time, accounting staff, rent, utilities, IT infrastructure, and general liability insurance are typical examples. Uniform Guidance provides several ways to handle them.

The 10% De Minimis Rate

Organizations that have never had a federally negotiated indirect cost rate may elect to use 10% of Modified Total Direct Costs (MTDC) as indirect costs without submitting a rate proposal. This option is indefinite — organizations may use it as long as they have not had a negotiated rate — and it is specifically designed to reduce administrative burden for smaller organizations.

The de minimis rate is a simplification, not an accurate cost recovery mechanism. Most organizations’ actual indirect cost rates are higher than 10% when properly calculated. Using the de minimis rate means the organization subsidizes federal programs from unrestricted funds. For organizations with limited unrestricted revenue, this is a financial stress that accumulates over time.

Negotiated Indirect Cost Rate Agreements (NICRAs)

An organization that submits an indirect cost rate proposal to its cognizant federal agency can negotiate a rate that reflects actual overhead costs. Negotiated rates are typically more favorable for the organization than the de minimis rate and provide a documented basis for charging overhead to all federal grants.

The proposal process requires calculating actual indirect costs from financial records and documenting the allocation methodology. Cognizant agencies review proposals, may negotiate adjustments, and issue a rate agreement covering one or more fiscal years. Once a NICRA is in place, it applies to all federal awards.

Negotiating a rate is worth evaluating if your organization: receives more than $500,000 per year in federal awards, has actual indirect costs that exceed 10% of MTDC, or anticipates significant growth in federal funding.

Time-and-Effort Documentation

Personnel costs are typically the largest single expenditure category on federal grants and the most frequently cited source of audit findings. Uniform Guidance requires that all charges for salaries and wages on federal grants be supported by records that accurately reflect the work performed.

The requirement is for contemporaneous records — records created during or immediately after the pay period they cover, not reconstructed weeks or months later. Time records must document:

• The total hours worked by the employee during the period
• The percentage of time devoted to each federal award and other activities
• The employee’s certification that the records are accurate

Two common documentation failures:

Monthly summaries of bi-weekly work. Organizations that document time monthly for bi-weekly pay periods are reconstructing time records, not documenting them contemporaneously. Auditors look for records that were created as the work occurred.

Budget estimates used as actuals. When personnel are budgeted at 50% on a grant, some organizations use the budget percentage as the actual charge without any underlying time documentation. Budget estimates must be reconciled to actual time records. If actual time differs significantly from the budget estimate, the charge to the grant must be adjusted.

Subrecipient Monitoring

When your organization passes federal funds to another entity — a community partner, a subcontractor carrying out part of a federally funded program — you take on monitoring obligations under 2 CFR Part 200.332.

As a passthrough entity, you must:

• Evaluate subrecipient risk before issuing a subaward
• Include required terms in the subaward agreement (federal award information, applicable requirements, audit requirements)
• Monitor subrecipient activities during the performance period
• Review financial and programmatic reports submitted by the subrecipient
• Verify that subrecipients with substantial federal expenditures have completed required audits
• Take corrective action when monitoring reveals compliance problems

Monitoring does not require in-person site visits for every subaward, but it does require documented review activity. An organization that issues $500,000 in subawards and has no monitoring documentation in its files has a compliance gap regardless of whether the subrecipient spent the money correctly.

The passthrough entity is responsible for its subrecipients’ compliance. If a subrecipient misuses federal funds, the passthrough entity may be required to repay those funds to the federal agency and then pursue recovery from the subrecipient separately.

Documentation Requirements and Retention

Every expenditure charged to a federal grant must be supported by source documentation that is maintained in the organization’s files. Source documentation includes invoices, receipts, canceled checks, payroll records, and time sheets. Purchase orders alone are not source documentation; the invoice for the purchased items is.

For personnel costs, time records are source documentation. For direct costs, invoices and receipts are source documentation. For indirect costs, the approved cost allocation methodology documentation is source documentation.

Records must be retained for three years from the date the final expenditure report is submitted, or longer if litigation, a claim, or an audit is pending. Records must be accessible for review by the federal agency, the Comptroller General, and auditors. Organizations that destroy records before the retention period ends are in violation even if the underlying compliance was otherwise correct.

Common Compliance Findings and How They Originate

Most Uniform Guidance compliance findings are not the result of intentional misuse. They originate from process gaps:

Time records filled out monthly instead of per pay period. Monthly time sheets for bi-weekly employees are retroactive reconstructions. Auditors know this and treat such records as insufficient documentation.

Indirect cost allocation methodology not documented in writing. The organization allocates overhead to grants using a consistent method, but the method was never written down. When an auditor asks for the methodology documentation, none exists.

Procurement records not maintained for federally funded purchases. A federally funded supply purchase that did not follow required competition procedures, or that did but lacks documentation showing the competition occurred, results in a finding regardless of whether the price paid was reasonable.

Subrecipient monitoring performed informally. Program staff have regular calls with subrecipient partners and are confident they are compliant, but none of the monitoring activity is documented. The monitoring happened but cannot be demonstrated.

The pattern in all of these: the substantive compliance was present, but the documentation was not. Building processes that generate compliance documentation as a byproduct of normal work — time records as part of the payroll cycle, procurement documentation as part of the purchase process, monitoring reports as part of the program management cycle — is the practical solution to most Uniform Guidance compliance risk.

DEFINITION

2 CFR Part 200 (Uniform Guidance)

The Office of Management and Budget's consolidated administrative requirements, cost principles, and audit requirements for federal awards to non-federal entities. Effective December 26, 2014 for new awards and incremental funding. Covers the full grant lifecycle from application through closeout, including financial management, allowable costs, procurement, property, subrecipient monitoring, and Single Audit requirements.

DEFINITION

Modified Total Direct Costs (MTDC)

The base used to calculate indirect costs under 2 CFR Part 200.1. MTDC includes all direct salaries and wages, applicable fringe benefits, materials and supplies, services, travel, and subawards and subcontracts up to the first $25,000 of each subaward. It excludes equipment, capital expenditures, charges for patient care, rental costs, tuition remission, and subaward amounts above $25,000. Organizations using the 10% de minimis rate apply it to the MTDC base.

DEFINITION

Indirect cost rate

A percentage applied to direct costs (typically MTDC) to recover organizational overhead that benefits multiple programs — administrative staff, rent, utilities, IT, and similar costs that cannot be directly assigned to a single grant. Negotiated indirect cost rates are established in a Negotiated Indirect Cost Rate Agreement (NICRA) between the organization and its cognizant federal agency. Organizations without a NICRA may use the 10% de minimis rate.

DEFINITION

Cognizant federal agency

The federal agency responsible for reviewing and approving an organization's indirect cost rate proposal and issuing a Negotiated Indirect Cost Rate Agreement. Typically the agency that provides the largest portion of the organization's direct federal funding. The cognizant agency is also responsible for certain oversight functions under the Uniform Guidance.

DEFINITION

Passthrough entity

A non-federal entity that receives federal financial assistance and passes some of those funds to a subrecipient. Passthrough entities bear responsibility for monitoring their subrecipients' compliance with federal requirements and must include specific award information in subaward agreements as required by 2 CFR Part 200.332.

DEFINITION

Time-and-effort documentation

Records required to support personnel costs charged to federal grants. Must document the percentage of time each employee devoted to each federal award for each pay period. Methods include activity-based reports, personnel activity reports, and budget estimates with after-the-fact reviews. Reconstruction of time records after the fact is not an acceptable documentation method under Uniform Guidance.