Grant money can be used for almost any legitimate expense that advances the funded project — staff salaries and benefits, supplies, travel, equipment, participant stipends, a share of overhead, and in some cases general operating support — as long as the cost is necessary, reasonable, tied to the award’s purpose, and not on the list of expenses federal rules flatly prohibit. What grants can be used for is defined first by the award agreement and then, for federal awards, by the cost principles in the Uniform Guidance at 2 CFR Part 200. Spending outside those rules becomes a “disallowed cost” that you repay from your own funds.
The Four Tests Every Grant Expense Must Pass
Before charging anything to a federal award, the cost has to clear four basic hurdles. It must be necessary and reasonable for carrying out the grant’s objectives. It must be allocable to the award, meaning it directly benefits the funded project rather than some unrelated activity. It must be treated consistently, so you cannot call the same expense a direct cost on one grant and an indirect cost on another. And it must conform to any spending limits in the award terms or the Uniform Guidance itself.
These tests apply to every category below. A cost that is perfectly appropriate for one grant can be unallowable on another if the award terms restrict it or the expense doesn’t advance that particular project’s goals.
What Grants Commonly Pay For
Personnel
Personnel costs are the largest line item on most awards. Gross salaries and fringe benefits are allowable for staff who perform project tasks. If someone splits time between the grant and other work, only the portion spent on the grant may be charged to it. Federal rules require records that accurately reflect the work performed, backed by an internal control system that gives reasonable assurance the charges are correct.
Supplies, Travel, and Other Direct Costs
Supplies such as laboratory materials, educational handbooks, and software licenses count as direct costs. So does travel for field research, site visits, or presenting findings at professional conferences. Every charge needs supporting documentation — receipts, travel authorizations, mileage logs — connecting the expense to an approved budget line. If auditors can’t trace a clear link between a cost and the project’s objectives, the expense may be disallowed.
Participant Support
Many grants pay direct costs on behalf of people who take part in a training program or conference but don’t work for your organization. Allowable participant support includes stipends, travel allowances, housing and meal allowances, registration fees, and training materials. Honoraria and travel for guest speakers are not participant support and must be budgeted separately. Participant support funds generally cannot be shifted to other budget categories without prior written approval from the awarding agency.
Equipment and Capital Expenditures
Capital grants fund long-term assets: land, new facilities, or extensive renovations. Federal regulations define “equipment” as tangible personal property with a useful life of more than one year and a per-unit cost of $10,000 or more. That threshold rose from $5,000 on October 1, 2024. Recipients must keep a detailed inventory of grant-funded equipment, including serial numbers, acquisition dates, and physical locations, because the grantor often retains a reversionary interest during the award period. If you stop using the asset for its intended purpose, the grantor can require it to be sold or the current market value returned.
Construction-heavy projects bring in additional layers. The Davis-Bacon Act applies to federal or federally assisted construction contracts over $2,000 and requires contractors to pay the locally prevailing wage. The Build America, Buy America Act requires iron, steel, manufactured products, and construction materials in federally funded projects to be produced in the United States. These rules sit on top of, not in place of, the ordinary cost principles.
Administrative and Overhead Expenses
Costs that support the whole organization rather than a single project — rent, utilities, general accounting, legal counsel, human resources — are indirect costs, recovered through a percentage rather than billed line by line. Many recipients negotiate a formal indirect cost rate with their cognizant federal agency, documented in a Negotiated Indirect Cost Rate Agreement. Organizations without a negotiated rate may elect a de minimis rate of up to 15 percent of modified total direct costs, a simplified option that needs no supporting documentation. That 15 percent ceiling took effect October 1, 2024, replacing the previous 10 percent. Once you elect the de minimis rate, you must use it on all federal awards until you obtain a negotiated rate.
No single expense may be charged as both a direct cost and an indirect cost on the same award.
Matching and Cost-Sharing Contributions
When a grant requires you to contribute your own cash or in-kind resources, those matching funds have to meet the same standards as any other grant expenditure. They must be verifiable in your records, necessary and reasonable for the project, and not already counted as a match on another federal award.
Volunteer labor is a common in-kind match. Professional or technical services from volunteers should be valued at the rate the organization pays its own employees for similar work; if you don’t employ anyone with those skills, use the local market rate. Donated property counts at fair market value on the date of the donation, and donated office space counts at the fair rental value of comparable space established by an independent appraisal.
Capacity Building and General Operating Support
Some grants pay for internal strengthening rather than a specific public-facing service. Capacity-building funds can cover professional development, strategic planning led by outside consultants, board governance training, and technology upgrades like donor management software or data reporting systems.
General operating support — sometimes called unrestricted or core funding — gives the broadest flexibility. It can go toward any expense that furthers the organization’s mission: filling budget gaps, hiring new staff, or responding to emergencies. You still have to show that funds supported activities consistent with your tax-exempt purpose or corporate charter, and no portion may be diverted for personal gain. Operating support is often the source organizations tap to meet the matching requirements on their restricted grants.
What Grants Cannot Pay For
Federal cost principles list several categories of spending that are unallowable on any federal award, regardless of what the grant agreement says:
- Alcoholic beverages, in every circumstance.
- Entertainment, including amusement, social activities, and associated items like gifts, unless the award specifically authorizes them for a direct programmatic purpose.
- Fundraising, including campaigns, endowment drives, and solicitation of donations, though fundraising that directly meets a federal program’s objectives may be allowed with prior written agency approval.
- Lobbying, including cash or in-kind contributions to political campaigns, communications urging the public to contact legislators, and attempts to improperly influence executive branch employees regarding a federal award.
- Fines and penalties from violations of federal, state, or local law.
- Goods or services purchased for an employee’s personal benefit, regardless of whether the value is reported as taxable income.
- Bad debts, including uncollectable accounts and related collection or legal costs.
- Interest on borrowed funds, with a narrow exception for certain financing costs to acquire or construct capital assets under specific conditions.
When lobbying costs are part of an organization’s indirect cost pool, they must be separately identified in the indirect cost rate proposal and excluded from the reimbursable total.
Costs That Need Prior Approval
Some allowable costs still require written approval from the federal agency before you incur them. Capital equipment purchases, pre-award spending, rearrangement and reconversion costs, foreign travel, and reallocation of participant support funds all fall into this category. Charging one of these without prior approval doesn’t automatically make it unallowable, but it significantly raises the risk of a disallowance finding during an audit.
Budget flexibility is also limited. If cumulative transfers between approved budget categories exceed 10 percent of the total award (including any cost share), you have to request prior approval before moving the funds. Splitting purchases across budget lines to stay under the threshold is not permitted.
If a project needs more time but not more money, many federal awards let the recipient initiate a one-time no-cost extension of up to 12 months, provided you notify the agency in writing with supporting justification at least 10 calendar days before the current end date. The extension cannot be used solely to spend down leftover balances. Any additional extension requires formal prior approval.
Procurement Rules When You Buy With Grant Money
Federal procurement standards apply the moment you use grant funds to purchase goods or services. The tiers work like this:
- Micro-purchases up to $15,000 can be made without competitive quotes, though the price must still be reasonable.
- Small purchases from $15,001 to $349,999 use simplified acquisition procedures, with price or rate quotes from an adequate number of qualified sources.
- Purchases of $350,000 and above require full and open competition through formal sealed bids or competitive proposals.
You may not split a procurement into smaller pieces to avoid a higher competition threshold. Sole-source contracts are allowed only in narrow circumstances, such as when an item is available from only one supplier or when competition has been solicited and found inadequate.
Every recipient must maintain a written conflict-of-interest policy covering employees, officers, agents, and board members involved in procurement decisions. No one with a financial or personal interest in a potential contractor may participate in selecting, awarding, or administering that contract. The policy must also prohibit employees from accepting gratuities or favors from contractors and spell out disciplinary consequences for violations.
Timing: Period of Performance and Closeout
Grant funds may only cover costs incurred during the period of performance — the window between the award’s start date and end date. Expenses before the start date or after the end date are generally unallowable unless the agency has approved pre-award spending or a no-cost extension.
Once the period of performance ends, closeout begins. Recipients must submit all final financial and performance reports within 120 calendar days, and all financial obligations must be liquidated within that same window. Subrecipients face a tighter 90-day deadline. The federal agency aims to complete all closeout actions within one year of the end of the performance period.
What Happens When You Spend Outside the Rules
Consequences scale with severity. The most common outcome is a disallowed-cost finding during an audit: when an auditor or agency decides an expense wasn’t allowable, you repay that amount from non-grant funds, either directly or through a reduction in future disbursements.
More serious violations — fraud, embezzlement, false statements, bribery, or a pattern of failure to perform — can lead to suspension or debarment. A suspended or debarred organization is listed as ineligible in SAM.gov, which bars it from receiving federal awards or subcontracts across the entire executive branch. The exclusion covers both procurement and grant programs, and federal contractors generally may not award subcontracts of $30,000 or more to a debarred entity.
Submitting false claims for grant reimbursement triggers the False Claims Act. Civil penalties currently range from $14,308 to $28,619 per false claim, plus damages of up to three times the amount the government lost. On the criminal side, knowingly presenting a false claim carries up to five years in prison under 18 U.S.C. 287, and making false statements in connection with a federal matter carries up to eight years under 18 U.S.C. 1001. Even unsuccessful applicants can face penalties if information in the application turns out to be false or fraudulent.
The through-line for every category above is documentation. Receipts, timesheets, procurement records, inventory logs, and board minutes are what turn an allowable cost into a defensible one when an auditor asks how the money was spent.