Direct costs are those costs which can be directly attributed to the project.
Types of Direct Costs
Salaries and wages, fringe, equipment, research supplies, consultants, subcontracts, maintenance contracts, and "other direct costs."
Costs must be 1) Reasonable, 2) Allocable to the project, 3) and Allowable
Reasonable: "Padding", "cushion", or utilizing a "fudge factor" results in "defective cost-pricing". Gross defective cost-pricing can result in audit disallowances if the costs cannot be reasonably substantiated. Although it is difficult to predict the future development and direction of the majority of sponsored projects, especially research and development, it is therefore all the more important to provide the sponsor with adequate justification for each budget line item at the proposal stage. This will impress upon the review panel and the sponsor’s contracting/grants office that the costs are substantiated and directly linked to the needs of the project and therefore less prone to reduction or elimination at award stage. Costs should be based on current and accurate rates with reasonable increases for inflation or anticipated changes to the project, see COLA’s.
With the advent and implementation of the Federal Government’s Cost Accounting Standards (CAS), costs must also be consistently treated across campus.
Allocable: costs must be directly related to the sponsored project activity.
Examples of unallocable costs:
- Charging 100% of a maintenance contract to one project although the covered piece of equipment is only utilized 50% time on that project.
- Including personnel costs for a temporary replacement Lecturer to cover a professor’s time while that professor is out of the classroom conducting research for the sponsored project activity.
Allocable solutions to the above:
- Charge the allocable portion (50%) of the maintenance contract.
- Include academic year salary commensurate with the percentage of effort the faculty member anticipates working on the project. The faculty members’ Department will not have to lay out funds to cover the sponsor funded academic salary, thus the Lecturer can be paid from those cost savings.
Allowable: costs must be allowable according to the governing cost principles, the policies of the sponsor, and UM procedures. For federally supported projects, The Office of Management and Budget’s (OMB) Circular A-21 is the document - other than sponsor guidelines - that determines allowability of cost. (see, Cost Restrictions On Federally Supported Projects.)
OMB circular A-21 is not applicable to non-federal projects unless the UM is subcontracted to by a non-federal sponsor with flow through federal terms and conditions.
Click here, to access OMB Circular A-21 for further discussion on direct costs on federally supported sponsored projects.