Cost Allocation Plan

A cost allocation plan is the written policy document that spells out exactly how your organization allocates shared costs. Think of it as the rulebook for functional expense allocation. It describes which costs are shared, what allocation bases you use (time, square footage, headcount, etc.), how often you update the allocations, and who's responsible for the process.

If you receive federal funding, a cost allocation plan isn't optional — it's required under the Uniform Guidance (2 CFR Part 200). The plan must be approved by your governing body and available for review by any federal awarding agency. Even if you don't receive federal funds, having a documented cost allocation plan is considered a best practice by auditors and most sophisticated funders.

A good cost allocation plan covers: direct costs (easily traceable to a specific program or function), indirect costs (shared costs that benefit multiple programs or functions), the methodology for allocating each type of indirect cost, the frequency of allocation updates, and the process for reviewing and approving changes. It should be reviewed annually and updated whenever your programs, staffing, or space usage changes significantly.

Without a cost allocation plan, you're essentially winging it on how shared costs are divided — and that's a problem for auditors, grantors, and your board. Federal grantors require it. State grantors increasingly require it. And auditors will flag the absence of a documented plan as a finding.

Beyond compliance, a good cost allocation plan ensures consistency and fairness. If two programs share office space, the plan ensures costs are split equitably. If your fundraising team grows and takes over more space, the plan triggers a reallocation. It removes subjectivity and protects your organization from accusations of cost-shifting between grants.