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Cost Allocation Narrative

Cost allocation was created to ensure that federal funds are used solely for programs and that no other federal funds may be used for any other purpose. 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. Note: The resource is currently under review.

Overview of Requirements
Clarifying Definitions
Audit Requirements
Related Links

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 Federal 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. The OMB Circulars do not specifically call for a cost allocation plan for discretionary grant programs like Head Start, but they require that the costs of shared resources be allocated fairly. To document to auditors and Federal reviewers that costs have been properly allocated, some written account or plan is strongly recommended. Grantee agencies are encouraged to discuss a proposed cost allocation plan with the ACF grants officer and the auditor who performs the required annual audit.

Clarifying Definitions

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 (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 Child Care Partnerships

To encourage Head Start grantee agencies to collaborate with other child-care programs, the 1998 amendments to the Head Start Act provide an exception to the general requirement to allocate costs. When there is a collaborative activity between Head Start and another Federal child care or early childhood education program, the costs of shared resources in two cost categories, equipment, and non-consumable supplies do not have to be allocated between the programs, so long as Head Start is the predominant source of funding for the activity. While these two categories are generally rather small in Head Start budgets, this exception is intended to reduce barriers to effective collaboration (Head Start Act Section 640 (a)(5)(E)(ii)). (See 45 CFR 74.34 and 45 CFR 74.35 for requirements relating to Equipment and Supplies, respectively.)

Audit Requirements


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.


2 CFR 220 Appendix A (C)(4) Allocable costs
2 CFR 225 Appendix A General principles for determining allocable costs
2 CFR 225 Appendix C State/local-wide central service cost allocation plans
2 CFR 225 Appendix D Public assistance cost allocation plans
2 CFR 225 Appendix E State and local indirect cost rate proposals
2 CFR 215.53(g) Indirect cost rate proposal and cost allocation plans (retention and access requirements for records)
2 CFR 230 Appendix A General principles
OMB Circular A-133 Section 305(b) Restriction on auditor preparing indirect cost proposal or cost allocation plan
45 CFR Part 74.53(g) Indirect cost rate proposal and cost allocation plans (retention and access requirements for records)
45 CFR Part 92.42(c)(4) Indirect cost rate proposal and cost allocation plans (retention and access requirements for records)

Last Updated: August 7, 2018