When a nonprofit, school or local government charges a cost to a Federal award, the charge has to pass a test before the Federal Government will reimburse it. Section 200.403 of the Uniform Guidance lists the factors that make a cost allowable. In a single audit the auditor tests those factors on the transactions charged to each major program, and a cost that fails becomes a questioned cost in the schedule of findings.
This page paraphrases the regulation as it reads on eCFR. Read 2 CFR 200.403 and the other cost principles in Subpart E of part 200 for the full text. Subpart E also contains item-specific rules, such as 200.430 on compensation, that apply on top of these general criteria.
What does 200.403 require?
Except where a statute authorizes otherwise, a cost must meet all of these criteria to be allowable under a Federal award:
| Paragraph | Criterion in plain terms |
|---|---|
| (a) | Necessary and reasonable for performing the Federal award and allocable to it under the cost principles |
| (b) | Conforms to the limitations or exclusions in the cost principles or in the award, as to types or amounts of cost items |
| (c) | Consistent with policies and procedures that apply uniformly to both federally financed and other activities of the recipient |
| (d) | Accorded consistent treatment, so a cost is not charged as a direct cost if another cost for the same purpose in like circumstances was allocated as an indirect cost |
| (e) | Determined in accordance with generally accepted accounting principles, except as otherwise provided for State and local governments and Indian Tribes |
| (f) | Not included as a cost, or used to meet cost sharing requirements, of any other federally financed program in the current or a prior period |
| (g) | Adequately documented |
| (h) | Incurred during the approved budget period, with the exception of administrative closeout costs, which may be incurred until the due date of the final report and must be liquidated before it |
The text also notes that at its discretion the Federal agency may waive prior written approvals to carry forward unobligated balances to later budget periods.
How do the criteria work together?
A cost can fail on one criterion even if it passes the rest. Four combinations come up regularly:
- Reasonable but undocumented. A conference registration that was necessary still fails (g) if no invoice, agenda or approval supports it. The audit finding is a documentation failure and the cost may be questioned in full.
- Allowable type, wrong period. A program supply order placed before the budget period starts fails (h) unless the award terms allow pre-award costs.
- Consistent treatment (d). A recipient that treats office supplies as indirect costs everywhere cannot charge printer toner to one award as a direct cost. See indirect costs.
- Duplicate funding (f). The same salary reported as match on one award and as reimbursed cost on another fails the test on at least one of them.
Uniform policy (c). A cost has to be consistent with policies the recipient applies to its other activities too. Charging a business class airfare to an award when the recipient's own policy limits all other staff travel to economy fails (c).
What is a questioned cost?
Section 200.1 defines a questioned cost as an amount expended or received from a Federal award that in the auditor's judgment is noncompliant or suspected noncompliant with Federal statutes, regulations or award terms, lacked adequate documentation to support compliance at the time of the audit, or appeared unreasonable and did not reflect the actions a prudent person would take. For the documentation case, the amount is calculated as if the undocumented portion were confirmed noncompliant. There is no questioned cost solely because of deficiencies in internal control.
Questioned costs feed the schedule of findings and the low-risk tests in the single audit. A known or likely questioned cost above 5% of a Type A program's Federal awards expended removes the program's low-risk status. See major program determination.
A worked illustration
Illustrative numbers only. An auditor tests 8 transactions from a major program's $400,000 of expenditures, with a total tested value of $60,000.
| Transaction | Amount | Result |
|---|---|---|
| Rent allocation | $12,000 | Passes |
| Staff training | $6,000 | Passes |
| Equipment purchase over the award's budget category limit | $9,000 | Fails (b), questioned |
| Vendor invoice dated after the budget period | $7,500 | Fails (h), questioned |
| Consultant invoice with no deliverable record | $4,500 | Fails (g), questioned |
| Payroll for two employees | $15,000 | Passes |
| Software license | $3,000 | Passes |
| Travel | $3,000 | Passes |
| Total | $60,000 |
Known questioned costs are $9,000 + $7,500 + $4,500 = $21,000, which is 35% of the sample ($21,000 / $60,000). If the sample was representative, projecting likely questioned costs to the $400,000 population is a judgment under the sampling plan. If the program's Federal awards expended were $400,000, known questioned costs alone are $21,000 / $400,000 = 5.25%, which is above the 5% marker that matters for low-risk status. Decisions on projection and reporting go to the engagement partner and the applicable GAGAS and Subpart F reporting requirements.
How should an auditor test?
Practice observations built from the text, not requirements of the regulation:
- Match each sample item to the award terms. Budget categories, prior approval requirements and period of performance appear in the notice of award.
- Apply the eight criteria as attributes in the test sheet, one column each. A missing attribute, such as budget period, is the one that usually fails.
- Use the compliance supplement. The OMB Compliance Supplement sets the audit objectives and procedures for the allowable costs requirement by program.
- Check for duplicates across awards and the cost-share records.
- Trace to supporting documents. Approvals, receipts, timesheets and deliverables, with dates.
- Evaluate against the schedule of findings. See the schedule of findings and questioned costs.
Frequently asked questions
What makes a cost allowable under the Uniform Guidance?
It must be necessary and reasonable, allocable to the award, conform to limits and exclusions, be treated consistently, follow GAAP, not be used for another federal program or cost share, be adequately documented and fall in the approved budget period, among the criteria in 200.403.
Are costs after the award ends allowable?
Administrative closeout costs may be incurred until the due date of the final reports and must be liquidated before the due date. All other costs must be incurred during the approved budget period.
Can a cost be allowable and still questioned?
A cost that meets the cost principles is not questioned. A cost is questioned when it is noncompliant, lacks adequate documentation at the time of audit, or appears unreasonable. An allowable-looking cost without support can be questioned.
Does an internal control deficiency alone create a questioned cost?
No. The definition says there is no questioned cost solely because of deficiencies in internal control.
Sources
- eCFR, 2 CFR 200.403 and the definition of questioned cost in 200.1 (current text, retrieved November 2026): ecfr.gov
- OMB, Guidance for Federal Financial Assistance, 89 Fed. Reg. 30046 (April 22, 2024)
Related
Part of CORAA University · Evidence and audit procedures: related guides, calculators and templates.
AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error