Lesson 2: The Four Tests

Reference – 45 CFR 75; §75.403 Factors affecting allowability of costs 

Let us turn our attention to the four tests used in determining the allowability of costs. This is important because proper use of federal funds is required by law. As a recipient of federal funds, you are responsible for knowing the requirements, and if you serve as a pass-through entity, you are also responsible for ensuring any sub-recipient is aware of the requirements. Another key factor is the responsibility for monitoring the use of funds to determine if budget expenditures are allowable, allocable, reasonable, and consistent. 

How budget expenditures are determined

1. Allowable (Conformance): Expenditure is permitted and not specifically prohibited 

2. Allocable: Traceable to specific activities of the grant project 

3. Reasonable: Cost that would be incurred by a prudent person; necessary for the grant’s performance 

4. Consistent: Assignment of costs to cost objectives