Subpart E: Cost principles 2024 Uniform Guidance · effective Oct 1, 2024

2 CFR 200.404: Reasonable costs

2 CFR 200.404 sets 2 requirements for organizations that receive federal grants and cooperative agreements. Applies when you build your application and budget, and to every cost you charge after award.

Shows up in your application: BudgetBudget justificationOrganizational capacity

What 2 CFR 200.404 requires

1. Allowable costs

What you must do

When it applies

Every cost item in the proposed budget

BudgetBudget justification

2. Allowable costs

What you must do

Cost-incurrence decisions must reflect prudence in view of responsibilities to the organization, its employees/students/members, the public, and the Federal Government, and must not deviate from the applicant's established written policies and procedures for incurring costs (paras (d)-(e)).

When it applies

Budget item is governed by an organizational written policy (travel, procurement, compensation)

Budget justificationOrganizational capacity

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Sections that refer to 2 CFR 200.404

2 CFR 200.420 Considerations for selected items of cost
2 CFR 200.431 Compensation—fringe benefits

Regulation text of 2 CFR 200.404

A cost is reasonable if it does not exceed an amount that a prudent person would incur under the circumstances prevailing when the decision was made to incur the cost. In determining the reasonableness of a given cost, consideration must be given to the following:

(a) Whether the cost is generally recognized as ordinary and necessary for the recipient's or subrecipient's operation or the proper and efficient performance of the Federal award;

(b) The restraints or requirements imposed by such factors as sound business practices; arm's-length bargaining; Federal, State, local, tribal, and other laws and regulations; and terms and conditions of the Federal award;

(d) Whether the individuals concerned acted with prudence in the circumstances considering their responsibilities to the recipient or subrecipient, its employees, its students or membership (if applicable), the public at large, and the Federal Government; and

(e) Whether the cost represents a deviation from the recipient's or subrecipient's established written policies and procedures for incurring costs.

Source: eCFR · checked Sep 17, 2026

Questions about 2 CFR 200.404

What does 2 CFR 200.404 require?

Each cost must not exceed the amount a prudent person would incur under the circumstances prevailing when the decision to incur it was made, considering whether it is ordinary and necessary for operations or award performance, the restraints of sound business practice, arm's-length bargaining, applicable laws and award terms, and market prices for comparable costs in the geographic area (intro, paras (a)-(c)). Cost-incurrence decisions must reflect prudence in view of responsibilities to the organization, its employees/students/members, the public, and the Federal Government, and must not deviate from the applicant's established written policies and procedures for incurring costs (paras (d)-(e)).

When does 2 CFR 200.404 apply?

Every cost item in the proposed budget. Budget item is governed by an organizational written policy (travel, procurement, compensation).

Plain-English summaries for information only, not legal advice. Always check the regulation text, your award terms and your agency’s guidance.