Cost allocation was created to ensure that federal funds are used solely for the programs designated. Allocation means the process of assigning a cost, or a group of costs, to one or more cost objectives. Grantees who have more than one funding source will find this information useful for making sure that each program bears its appropriate share of the costs.
Overview of Requirements
When Congress appropriates funds for a specified purpose, such as the Head Start program, its intention is that those funds will be used solely for that program and that no other federal funds may be used for the same purpose. This aspect of appropriation law affects every federal program. For example, when Congress makes $100 available to Head Start, no more than $100 of federal funds may be spent on Head Start; and none of the $100 may be used for any other purpose—including a closely related purpose, such as child care for a low-income child not eligible for Head Start.
This basic provision is easy to address when a Head Start grantee agency receives only federal Head Start funds and is managing only a Head Start program. However, when a grantee agency receives funds from two or more sources, including federal, state, local government, and/or private funding, greater familiarity with the provision is required to successfully manage the situation. This is especially true when the grantee agency uses some items for both programs. For example, consider office space: It would be possible for the grantee agency to provide separate office space for each program, but that would not be a wise use of resources in many cases. Instead, the two programs can share office space. However, federal funds from each program can be used only to support that program—otherwise one program would be supporting or subsidizing another, which would be a violation of appropriation law.
The requirement of the law in this case is met by deciding on a way to have each of the programs bear its appropriate share of the cost of the common office space. This is accomplished by using a process called cost allocation, and a written account of the basis—the methods, formulas, and rules—for the allocation is the cost allocation plan. Uniform Guidance, 45 CFR § 75, defines "allocation" as the process of assigning a cost, or a group of costs, to one or more cost objective(s), in reasonable proportion to the benefit provided or other equitable relationship. The process may entail assigning a cost(s) directly to a final cost objective or through one or more intermediate cost objectives. Uniform Guidance Required Certifications, 45 CFR § 75.415, requires certification of the Cost Allocation Plan. In addition, the certified Cost Allocation Plan must be submitted with the annual grant application.
Cost allocation means the process of assigning to two or more programs the costs of an item shared by the programs. The goal is to ensure that each program bears its fair share, and only its fair share, of the total cost of the item. The term is sometimes used by cost accountants to describe the allocation of costs, especially overhead costs, to specified accounting categories. For purposes of cost allocation in Head Start grantee agencies, cost allocation refers to the allocation of costs to various sources of funding, not to accounting categories.
Cost allocation plan means a written account of the methods used by the grantee agency to allocate costs to its various funding sources.
The requirement to allocate the costs of shared resources can be met by using logical and rational methods to ensure that each program is paying only its fair share of the cost of an item used in common, and that no program is subsidizing another. Generally, the methods used to allocate a shared cost should be the simplest, most straightforward way of allocating this type of cost fairly. Complex, highly detailed methods should be avoided when a simple one will achieve the objective.
Methods, rules, or formulas that use percentages or fractions of cost items are acceptable. For example, a method of allocating staff costs could be as simple as a statement of the percentage of time attributable to a funding source. If an individual spends half of the day on Head Start activities, another 25 percent on activities supported by funding source A, and 25 percent on activities supported by funding source B, then the cost allocation rule is 50 percent to Head Start, 25 percent to funding source A, and 25 percent to funding source B. These percentages may then be applied to all relevant personnel costs for that individual (or group of individuals) for a budget period. Minute-by-minute, hour-by-hour allocation is not required, but there must be a way to reasonably establish the basis for the allocation rule, such as agency or classroom schedules or prior year reports.
The cost allocation plan for a Head Start agency would be the combined individual allocation schemes for all the shared costs of the program. To keep the plan as simple as possible, unnecessary proliferation of individual schemes should be avoided. General schemes that can be applied to large portions of the agency's budget and still fairly allocate shared costs are preferable to complex detailed schemes.
Each of the major "cost centers" or cost items in the agency's budget should be looked at for a reasonable, fair way to allocate the costs of that shared resource. The method for allocating the cost of facilities (office space, for example) may be quite different than the method for staff, but still expressed in simple percentage terms. For example, an agency could analyze the space (expressed in square feet) used in the administration of various programs. If the Head Start director and secretary use 200 square feet in an agency's headquarters building with a total of 2,000 square feet, then Head Start's fair share of that space's cost is 10 percent (200/2,000). Other cost items would be analyzed in similar terms, using appropriate measures for each.
The nature and use of each cost item determines the most suitable measure for that item and the best scheme for the allocation of costs. Taking an approach such as "Head Start has the largest budget, so Head Start should pay the largest share of costs" is not acceptable. The Head Start program's share of an agency budget is determined by the allowable and reasonable cost of providing Head Start services as reflected in the cost allocation plan, not by the quantity of Head Start dollars going into the agency's total budget.
To carry out the requirement of appropriation law, a cost allocation plan should:
- List the sources of federal and other revenue for the program, supported by historical or other data to substantiate the amounts
- Describe how many of the total number of Head Start enrollees are covered by federal Head Start funds in the cost allocation plan if the agency is serving children with funds from more than one source
- Describe the methods used to determine the allocation of the costs of shared resources to the various funding sources
- Specify the basis for allocating costs within specific cost categories (e.g., personnel, space, supplies) and provide a description for how expenditures within the major cost categories will be allocated and recorded in the grantee agency's accounting system
Cost Allocation in Early Head Start-Child Care Partnerships
The Early Head Start-Child Care (EHS-CC) Partnership program represents a unique opportunity to leverage and maximize resources utilizing multiple funding sources to enhance the early care and education capacity of child care partners and improve outcomes for infants and toddlers, far beyond the scope of those enrolled in the program. Grantees will utilize EHS-CC Partnership funds to partner with local child care centers and family child care homes. Partnership funds will enhance existing budgets that include the Child Care and Development Fund (CCDF) and/or other existing child care funding. CCDF funds may be used in collaborative efforts with Head Start programs to provide comprehensive child care and development services for children who are eligible for both programs. In fact, the coordination and collaboration between Head Start and the CCDF is strongly encouraged by sections 640(g)(1)(D) and (E), 640(h), 641(d)(2)(H)(v), and 642(e)(3) of the Head Start Act in the provision of full working day, full calendar year comprehensive services. In order to implement such collaborative programs, which share, for example, space, equipment, or materials, grantees may layer several funding streams so that seamless services are provided.
- Layer 1: The first, or foundational layer, is made up of the core child care services that already exist in partner programs. This represents the costs of services that are covered by the child care subsidy/voucher (including any required parent co-pays) or any other revenue streams that are supporting core child care services. If an EHS-CC Partnership-enrolled child loses the child care subsidy, EHS-CC Partnership funds can cover the temporary loss to ensure continuity of services for the child.
- Layer 2: The second level of funding is made up of program-level service and environmental enhancements that are needed to meet EHS requirements. This represents costs in a classroom in which enrolled children are served that may include: standard developmental screenings for all children in a classroom; an enhanced curriculum; classroom supplies, materials, and equipment; training and education for teachers and other providers; enhanced pay for teachers who meet EHS education requirements; increased staffing to meet EHS-required staff-child ratio and group size requirements; and minor facility renovations or equipment needed to meet EHS standards. These enhancements, paid by EHS-CC Partnership funding, must directly benefit EHS-CC Partnership-enrolled children, but are also expected to benefit other children sharing a classroom or service environment with enrolled children. This is an important feature of the program.
- Layer 3: The third layer is made up of services provided to individual EHS-CC Partnership-enrolled children and their families, such as salaries and fringe benefits for family support workers supporting EHS families, external referrals to health and mental health providers, home visits, and other family support services. It is important to note that EHS-CC Partnership funds cannot be used to provide Layer 3 individual services for children and families not enrolled in the EHS-CC Partnership. Other sources of funding (e.g., foundation or other state and local funding) can be used to provide similar services to non-enrolled children and families.
Finally, EHS-CC Partnership funds must supplement, not supplant, existing child care funds. Grantees must ensure that they have adequate source documentation to identify costs within the three layers of funding that complies with the requirements of the Uniform Guidance (45 CFR § 75) for federal grants. The concept of layering funds is used to assure that EHS-CC Partnership funds will enhance service quality without duplication or replacement of existing child care funding.
To determine whether cost allocation is needed, an auditor will first ask whether the agency receives funds from more than one federal (or other) source. If the answer is no, no further audit action is necessary; there are no resources being shared, therefore, the allocation of costs is unnecessary. If the answer is yes, the auditor will investigate to see whether any resource in the agency is being shared by two or more programs. If there are shared resources, the auditor will ask for an explanation of how the resources' costs are allocated among the programs. A written plan provides the auditor with a clear description of how this is accomplished.
The auditor or reviewer will analyze the methods used to allocate costs and determine their adequacy and appropriateness. If the auditor is convinced that the methods and their application have resulted in the reasonable allocation of costs, no further action is necessary. However, if the methods are flawed or not correctly applied, costs that have been inappropriately charged to the Head Start program could result in an audit or noncompliance finding and be disallowed.
Resource Type: Article
National Centers: Program Management and Fiscal Operations
Audience: Directors and Managers
Last Updated: November 21, 2023