Federal grant budgets are organized into direct costs — personnel, fringe benefits, travel, equipment, supplies, contractual, and other direct costs — and indirect costs (Facilities and Administrative, or F&A). Each category has specific allowability rules under 2 CFR 200 (Uniform Guidance) and agency-specific restrictions stated in the FOA. Cost sharing is sometimes required by the solicitation; voluntary committed cost sharing beyond what is required creates binding obligations and should be avoided.
A federal grant budget is not simply an estimate of what your project will cost — it is a formal compliance document governed by federal regulation. Every line item you include must satisfy three fundamental tests under 2 CFR 200: the cost must be allowable (permitted under the regulations and the specific award terms), allocable (reasonably charged to this project in proportion to actual use or benefit), and reasonable (consistent with what a prudent person would pay for the same item or service under similar circumstances). Understanding each budget category in this framework is foundational to both competitive application budgets and compliant grant management.
1. 2 CFR 200: The Governing Framework
The Office of Management and Budget's Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards — universally known as the Uniform Guidance and codified at 2 CFR Part 200 — is the master regulation governing how federal grants must be accounted for across all recipient types (universities, nonprofits, state and local governments, hospitals, and small businesses participating in SBIR programs).
Prior to 2014, separate circulars governed different recipient types (A-21 for universities, A-122 for nonprofits, A-87 for governments). The Uniform Guidance consolidated these into a single framework. Key sections relevant to budgeting include:
- Subpart D (Post Federal Award Requirements) — financial management standards, allowable costs, and prior approval requirements for budget modifications.
- Subpart E (Cost Principles) — the comprehensive list of allowable and unallowable costs. Section 200.420-200.475 covers 55 specific cost categories with detailed allowability rules for each.
- Subpart F (Audit Requirements) — the Single Audit threshold ($750,000) and audit requirements for non-federal entities.
Agency-specific regulations and the terms of individual award notices supplement — and sometimes restrict — the Uniform Guidance. The FOA and the Notice of Award are the authoritative documents for any specific grant. When in doubt, the most restrictive requirement governs.
2. Personnel: Salaries, Wages, and Effort
Personnel costs — salaries and wages — represent the largest budget category in most federal research and program grants, typically 50-70% of total direct costs. Every person charged to a federal grant must have a documented role that connects directly to the project's scope of work, and their effort level must be expressed as a percentage of their total institutional appointment.
- Effort calculation — Effort is expressed as a percentage of a person's total professional time. A researcher who devotes one day per week to a grant on a 5-day work schedule is at 20% effort. The dollar amount is calculated as: (Annual Salary × Effort %) × (Grant Period / 12 months). Effort commitments become binding — if a key person's effort drops substantially without prior approval, the agency may require a budget adjustment or return of funds.
- NIH salary cap — NIH imposes an Executive Level II salary cap ($221,900 in FY2026) on what can be charged to any NIH grant for an individual's compensation. Researchers earning above this amount charge only up to the cap rate. Institutional salary supplements above the cap must be paid from non-federal funds.
- Summer salary (academic) — Faculty at academic institutions are often on 9-month or 10-month academic appointments. Up to two months of summer salary may be charged to federal grants per the NIH and NSF standard policies, subject to the applicable cap and the extent of actual effort.
- Key personnel vs. other personnel — Key personnel (usually PI, co-PI, and critical named staff) require agency approval for any change in effort exceeding 25% or for replacement. Changes to other personnel typically can be made without prior approval if within budget and consistent with the award scope.
- Time and effort documentation — Federal recipients must maintain a system for documenting personnel effort on federal awards. Acceptable systems include effort reports, certified time logs, or activity-based records. Inadequate time and effort documentation is among the most common audit findings.
3. Fringe Benefits
Fringe benefits — employer contributions to FICA, health insurance, retirement plans, disability insurance, and similar employee benefits — are calculated as a percentage of salary and wages. Fringe benefit rates are institution-specific and must reflect actual costs at the organization's negotiated or calculated rates.
Typical fringe benefit rates range from 20-35% of salary for full-time employees. Part-time employees and graduate students may carry lower fringe rates because they do not receive the full benefits package. The budget justification must specify which rate is being applied to which personnel category and provide the source of the rate (negotiated rate agreement with the federal cognizant agency, or a calculated institutional rate).
Organizations that do not have a formally negotiated fringe rate should use a consistent, documented method for calculating fringe costs and apply it uniformly across all employees in the same category. Inconsistency in fringe rate application across employees in similar categories triggers scrutiny during audits.
4. Travel: Allowability and Per Diem
Travel costs are allowable when they are necessary, reasonable, and allocable to the project. The budget justification for travel must identify: (1) who will travel, (2) the purpose of the travel, (3) the destination (domestic or foreign), and (4) the estimated cost with a breakdown of airfare, hotel, per diem, and registration fees where applicable.
- Federal per diem rates — Domestic travel lodging and meals and incidental expenses (M&IE) must follow the GSA per diem rates published for each city (available at gsa.gov/travel). Rates vary by location and are updated annually. Claiming above-per-diem hotel costs requires documentation of why lower-cost alternatives were unavailable.
- Airfare class of service — Federal regulations require coach class airfare on domestic routes under 14 hours. Business class on international routes is allowable when the flight exceeds 14 hours. Premium economy is generally treated as business class for this purpose.
- Foreign travel — Travel outside the United States typically requires prior approval from the awarding agency unless the FOA or award terms specifically waive this requirement. The Fly America Act requires the use of U.S. flag air carriers for federally funded international travel unless a specific exception applies (Open Skies agreements cover EU destinations).
- Conference travel — Travel to professional conferences must be justified by the project's dissemination plan. Registration fees for conferences are allowable when the conference directly advances the project's objectives and the attendance is allocable to the grant. Attendance at multiple conferences per year requires proportional justification.
5. Equipment and Supplies
Equipment is defined under 2 CFR 200 as tangible personal property with a unit cost of $5,000 or more and a useful life of more than one year. This threshold distinguishes equipment from supplies. Key rules governing equipment purchases on federal grants:
- Equipment is excluded from the Modified Total Direct Cost (MTDC) base — meaning no indirect costs are applied to equipment purchases, which makes equipment-heavy budgets effectively reduce the total indirect cost burden.
- Purchasing equipment not listed in the approved budget typically requires prior approval from the awarding agency if the cost is significant, even if within budget categories.
- Equipment purchased with federal funds remains the property of the recipient organization but is subject to federal requirements for maintenance, insurance, and disposition at the end of the award. Equipment valued over $5,000 must be inventoried and tracked.
- Equipment that will be used only partially on the federal project must have its cost allocated proportionally — only the fraction of use attributable to the federal project can be charged.
Supplies are all consumable items with a unit cost under $5,000 or a useful life under one year. Laboratory reagents, office supplies, printing costs, software licenses (typically), and similar items fall in this category. Supplies are included in the MTDC base and carry the full indirect cost rate. Budget justifications for supplies typically categorize by type (e.g., "laboratory reagents: $8,000 for PCR consumables, cell culture materials, and molecular biology kits aligned with Aim 2 experiments").
6. Contractual: Subcontracts and Consultants
The contractual budget category covers two types of external relationships: subcontracts (subawards) with other organizations, and consultant agreements with individuals.
Subcontracts (subawards) are issued when a collaborating organization has substantial programmatic responsibility — they are conducting a portion of the project's scope of work, not merely providing a service. Subawards have significant compliance implications:
- The prime recipient (your organization) is responsible for monitoring the subawardee's programmatic and financial performance throughout the award period.
- Subawards require a full budget, scope of work, period of performance, and — if the subawardee is a university or nonprofit — their negotiated indirect cost rate.
- MTDC exclusion: Only the first $25,000 of each subaward is included in the MTDC base for indirect cost calculation. Subaward costs beyond $25,000 per subaward are excluded from MTDC. This rule significantly reduces indirect costs on grants with large subawards.
- Flow-down requirements mandate that subawardees comply with applicable federal regulations, including 2 CFR 200, Uniform Guidance, civil rights requirements, and program-specific terms. The prime recipient must ensure these are included in the subaward agreement.
Consultants provide specific, limited services to the project without holding programmatic responsibility. Consultant costs are allowable when the rate is reasonable — consistent with the consultant's ordinary charges for similar work outside the federal project. A written agreement specifying scope of services, deliverables, and compensation is required. Consultants are included in MTDC unless their costs are treated as subcontracts (if they have substantial programmatic responsibility, they should be subcontractors, not consultants).
- Personnel typically 50-70% of research grant direct costs
- Fringe benefit rates typically 20-35% of salary (institution-specific)
- Equipment threshold: $5,000 unit cost + useful life >1 year
- Equipment excluded entirely from MTDC (no indirect costs applied)
- Subaward MTDC exclusion: only first $25,000 per subaward included in MTDC base
- NIH salary cap (FY2026): $221,900 (Executive Level II)
- De minimis indirect cost rate: 10% of MTDC (for organizations without negotiated rate)
- Cost sharing once committed in approved budget becomes a binding legal obligation
7. Other Direct Costs
The "other direct costs" category captures allowable project expenses that do not fit neatly into the standard budget categories above. The allowability of items in this category varies significantly by agency and program. Common items include:
- Participant support costs — Stipends, travel, and subsistence for project participants (e.g., human subjects in research, training program participants, community members in environmental justice projects). Participant support costs are excluded from MTDC and are treated separately in the budget. They require prior agency approval for changes.
- Publication and dissemination costs — Article processing charges (APCs) for open-access publication, printing of research reports, and project website hosting are generally allowable when connected to the project's dissemination plan. NIH mandates open-access publication through PubMed Central for NIH-funded research, and publication costs are allowable under NIH awards.
- Training and tuition remission — Graduate student tuition and fees are allowable at research universities as a direct cost when the student's effort is charged to the grant. These may be excluded from MTDC depending on the institution's negotiated rate agreement.
- Data storage and cloud computing — Research computing costs — cloud storage, HPC allocations, data repository fees — are increasingly common in federal grant budgets and are allowable as direct costs when specifically allocable to project activities.
- Human subjects costs — IRB fees, patient recruitment costs, and subject compensation (gift cards, stipends) are allowable as direct costs when connected to approved human subjects research protocols.
8. Indirect Costs (F&A)
Indirect costs — formally called Facilities and Administrative (F&A) costs — represent shared organizational overhead that supports federal grant activities but cannot be attributed to any single project. Examples include building utilities, centralized administrative services, library resources, and institutional compliance infrastructure. These costs are real and significant; federal regulations recognize their legitimacy and require that federal awards contribute to their coverage.
Indirect costs are calculated as a percentage of the Modified Total Direct Costs (MTDC), which is defined as total direct costs minus:
- Equipment (unit cost $5,000+)
- Capital expenditures
- Patient care costs
- Tuition remission
- Subaward costs exceeding $25,000 per subaward
- Participant support costs (when excluded per award terms)
Organizations negotiate their F&A rate with a federal cognizant agency — typically DHHS for research universities and nonprofits, ONR for defense contractors. The negotiated rate agreement specifies different rates for different activities (on-campus research, off-campus research, instruction, other sponsored activities). Rates for major research universities can range from 45% to 70%+ of MTDC for on-campus research.
Organizations that have never negotiated an F&A rate may use the de minimis rate of 10% of MTDC, as permitted under 2 CFR 200.414(f). This rate is lower than most negotiated rates but is available to any organization that has not negotiated one. Some agencies cap indirect cost rates for specific programs — NSF training grants, many USDA programs, and some EPA programs set maximum indirect cost rates in the solicitation. Always check the FOA for rate caps before budgeting.
Indirect costs are sometimes perceived as a bureaucratic overhead deduction that hurts applicants. In fact, indirect costs are a legitimate — and legally required — component of the true cost of federal grant activities. Applying indirect costs ensures that your organization's infrastructure is funded proportionally to the project's burden on it. Artificially reducing or eliminating indirect costs to make a budget look leaner is prohibited and is considered misrepresentation of costs to the federal government.
9. Cost Sharing and Matching
Cost sharing (also called matching) refers to project costs that are covered by the recipient organization or third-party sources rather than by the federal award. Cost sharing takes two forms:
- Mandatory cost sharing — Required by statute or as a condition of the award. The FOA will specify the required match percentage or amount and the allowable sources of match funds. For example, some DOE and NSF programs require 20-50% non-federal cost sharing. Mandatory cost sharing must be documented with a committed source before submission and tracked throughout the award.
- Voluntary committed cost sharing — Pledging non-federal resources beyond what the solicitation requires. This practice is strongly discouraged by NIH, NSF, and most major agencies. The 2001 NSF Voluntary Cost Sharing policy explicitly prohibits reviewers from considering voluntary cost sharing in their evaluation. Once included in an approved application budget, voluntary committed cost sharing becomes a binding legal obligation — the organization must provide, document, and report the pledged resources or face potential recovery actions.
The source of cost sharing is equally regulated. Match funds must be:
- Non-federal — Federal funds (from other federal awards) generally cannot be used as match for a federal grant. Exceptions exist for specific programs authorized by statute.
- Verifiable — The source of match must be documented. Cash match requires bank records or accounting entries. In-kind match (donated services, space, equipment) requires fair market value documentation.
- Not used for other awards — The same non-federal costs cannot be used as match for two different federal grants simultaneously.
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