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Cost Allocation Plans Under 2 CFR 200: Central Service and Indirect Cost Plans Explained
Last updated: October 11, 2026 · Independent guide · We do not sell rankings or coverage.
A cost allocation plan is the documented method a government or other federal award recipient uses to identify shared costs and assign them to the departments, funds and programs that benefit from them. Under the Uniform Guidance, a state or local government’s central service cost allocation plan follows 2 CFR 200 Appendix V and distributes the cost of services such as accounting, purchasing and IT to operating departments. Each department then folds those dollars into its own indirect cost proposal under Appendix VII, which produces the indirect cost rate it charges to federal awards.
The rule in brief
- Who it applies to: states, local governments and Indian Tribes that claim central service or indirect costs on federal awards. School districts follow the same appendices, with rates approved by their state education agency. Nonprofits use Appendix IV and universities use Appendix III instead.
- Central service plans (Appendix V): every state submits one to HHS each year it claims central service costs. A “major local government” (more than $100 million in direct federal awards) submits annually to its cognizant agency. Other local governments prepare a plan and keep it for audit.
- Indirect cost proposals (Appendix VII): a department or agency receiving more than $35 million in direct federal funding in a fiscal year must submit its proposal. Those at $35 million or less prepare and retain it unless asked.
- Key dates: central service plans are due within six months before the start of the fiscal year. Indirect cost proposals are due within six months after the fiscal year closes.
- Official source: 2 CFR 200 Appendix V and Appendix VII on the eCFR. We checked the text on October 11, 2026, including the revisions that took effect October 1, 2024.
What a cost allocation plan is under 2 CFR 200
2 CFR 200.416 says a central service cost allocation plan is how a department claims its share of costs such as motor pools, computing, purchasing and accounting. The same section points to Appendices V, VI and VII for the detailed requirements.
Appendix V splits central services into two kinds. Allocated central services benefit operating agencies but are not billed to them, so they are spread on a reasonable basis. General accounting, personnel administration and purchasing are typical examples. Billed central services are charged on a fee-for-service basis, such as computer services, transportation, insurance and fringe benefits.
How a cost allocation plan differs from an indirect cost rate
The two documents are connected, but they produce different outputs. A central service plan produces dollar amounts assigned to each department. An indirect cost proposal under Appendix VII produces a rate, calculated by dividing a department’s indirect cost pool by a direct cost base such as direct salaries and wages or total direct costs. The department’s pool includes its own administrative costs plus the central service costs it received through the plan.
A negotiated indirect cost rate agreement (NICRA) is the signed result of that rate negotiation. Governments usually need both an approved central service plan and a rate for each department that charges indirect costs. Nonprofits negotiate a NICRA from an Appendix IV proposal and have no Appendix V plan. If you have no negotiated rate, the de minimis indirect cost rate of up to 15 percent of modified total direct costs is the main alternative.
What the plan must contain
Section E of Appendix V sets the documentation. Every plan needs an organization chart showing the central service activities, a copy of the Comprehensive Annual Financial Report (or the executive budget if you propose budgeted costs) and a signed Certificate of Cost Allocation Plan. The certificate states that the costs are allowable, allocable and not also claimed as direct costs.
For each allocated service, you describe the service, name the unit that provides it and the agencies that receive it, list the expense items, state the allocation method and include a summary schedule of the allocation to each agency. Internal service funds with an operating budget of $5 million or more need more: a balance sheet, revenue and expense statement, billing method and rate schedule, and a comparison of revenue to allowable cost. Self-insurance and fringe benefit pools have their own schedules.
States also include a projection of next year’s allocated costs and a reconciliation of actual allocated costs to the estimates for a recent year. Allocated costs are usually approved on a “fixed with carry-forward” basis, so the difference between the approved amount and actual cost flows into a later year.
Costs you cannot put in the plan
2 CFR 200.444 makes general costs of government unallowable. That covers the governor’s or chief executive’s office, legislatures, county supervisors, city councils and school boards, the courts, and general public services such as police and fire unless a program statute allows them as direct costs. For this reason the Washington State Auditor’s Office suggests preparing two plans: a full-cost plan for fee setting and a grant plan without these costs.
Allocation bases agencies use
Appendices V and VII ask for a reasonable, equitable basis but list no required statistics. The allocation bases below come from guidance published by MRSC with the Washington State Auditor’s Office.
| Central service | Common allocation base | Where the statistic usually comes from |
|---|---|---|
| Payroll and human resources | FTEs, employee count or hours worked | HR or payroll system |
| Accounts payable and purchasing | Number of transactions | ERP transaction counts by department |
| Budget and financial reporting | Budget appropriations or year-end fiscal totals | General ledger |
| Facilities operation and maintenance | Square footage or building occupants | Facilities space inventory |
| Information technology | Number of computers, servers or databases | IT asset or help desk system |
MRSC describes one-step, two-step and reciprocal allocation methods, and the last two account for central departments that serve each other. The Washington auditor lists common cost allocation problems: no written plan, a plan not updated for current operations, unsupported estimates and estimates never reconciled to actual expenditures. For the internal fairness side of allocation, see our guide to making shared service allocation feel fair.
Illustration: from central services to a department rate
The figures below are an illustration, not real data. A city’s accounting office costs $900,000 a year and is allocated by AP transaction count. The Health Department processed 6,000 of the city’s 40,000 transactions, or 15 percent, so it receives $135,000. Facilities cost of $1,200,000 is allocated by square footage, and Health occupies 30,000 of 400,000 square feet, or 7.5 percent, so it receives $90,000.
Health’s indirect cost pool is its own $375,000 of departmental administration plus the $225,000 of central services, or $600,000. Divided by $3,000,000 of direct salaries and wages, the proposed Appendix VII rate is 20 percent.
Who submits, who keeps the plan on file
Appendix V separates three groups. States submit to HHS, and major local governments submit to their cognizant agency for indirect costs, which is generally the federal agency providing the most funding and serves for five years once assigned. Every other local government must still keep a compliant plan on file for audit. If a local government receives federal money only as a subrecipient, its pass-through entity monitors the plan.
School districts are a common case. The U.S. Department of Education says on its indirect cost guidance page (last reviewed January 14, 2025) that LEA rate oversight is delegated to the state education agency. Some Department of Education programs with supplement-not-supplant requirements must use a restricted rate calculated under 34 CFR 76.564 to 76.569, which removes some general management and occupancy costs from the pool.
Deadlines and penalties
Central service plans are prepared, and submitted where required, within six months before the start of each fiscal year. Indirect cost proposals under Appendix VII are due within six months after the fiscal year closes. The cognizant agency can grant extensions case by case.
The consequences are financial. Central service costs left out of the plan are not reimbursed. If a plan or proposal later turns out to include unallowable or non-allocable costs, the cognizant agency can require an adjustment or a refund, possibly with interest. Appendix V also treats working capital reserves above 60 days of cash operating expenses as unreasonable without cognizant agency approval.
Records you must keep
Under 2 CFR 200.334(f), the three-year retention clock for a plan or proposal and its support starts on the submission date if you submit it for negotiation. If you do not submit it, the clock starts at the end of the fiscal year the plan covers. Keep at least the following:
- The signed certificate, the plan or proposal, and the financial report it ties to.
- Dated source extracts for every statistic, such as FTEs, space surveys and transaction counts.
- Workpapers for removed unallowable costs, the allocation sequence and the carry-forward reconciliation.
- The approval letter or rate agreement, plus your Schedule of Expenditures of Federal Awards if you have a Single Audit.
What to set up in your systems
Plans built in spreadsheets drift away from the general ledger. Holding the allocation statistics in the ERP and running the allocation from them means the plan’s schedules and the posted entries use the same numbers.
Sage Intacct. Sage Intacct’s help center says statistical accounts track nonfinancial data such as headcount, number of contracts and square footage, entered through statistical journals that do not need to balance (last modified October 1, 2026). Sage’s product page says Dynamic Allocations can use statistical accounts or relative financial balances as the basis and reverses the prior allocation for the same period before posting a new one. The help center adds that a snapshot of the setup and results is attached to the posted entry (last modified October 8, 2026). Sage’s product page does not say whether Dynamic Allocations is included or priced separately, so ask for it as a named line on your quote.
Workday. Workday Financial Management runs allocations against a choice of basis types. Its “Basis Types” reference (updated April 3, 2026) lists headcount, ledger accounts and statistic values as pro rata bases. Its “Enter Statistic Values” page (updated June 23, 2023) says to add or update statistics through the Enterprise Interface Builder.
Tyler Technologies. Tyler’s public knowledge base documents Munis allocation codes that split a single transaction across general ledger accounts by fixed percentages totaling 100 percent (article updated May 13, 2025). We could not find public Tyler documentation for a statistic-driven allocation run, so if you use Munis, ask Tyler to demonstrate one in your version.
In any system, tag each statistic by department and fund, lock the snapshot used for the plan year, and post allocations to separate accounts. Smaller organizations can compare options in our nonprofit and fund accounting software guide.
How we researched this
We read the current eCFR text of 2 CFR 200.416, 200.444, 200.334 and Appendices V and VII on October 11, 2026, after the October 1, 2024 revisions. We also read Department of Education guidance, the top-ranking pages for this term and vendor documentation from Sage, Workday and Tyler. No vendor paid for inclusion.
Related guides
- NICRA: How Negotiated Indirect Cost Rates Work
- Single Audit Requirements: $1M Threshold and Major Programs
- SF-425 Federal Financial Report: Lines, Due Dates, Ledger
Frequently asked questions
What is the difference between a cost allocation plan and an indirect cost rate?
A central service cost allocation plan assigns dollars of shared central costs to departments. An indirect cost rate is a percentage each department applies to a direct cost base to charge indirect costs to federal awards. The plan feeds the rate, because the allocated central costs become part of the department’s indirect cost pool.
Does a small city have to submit a cost allocation plan?
Only major local governments, those with more than $100 million in direct federal awards, must submit annually. A smaller city still has to prepare a compliant plan and keep it with support for audit if it charges central service costs to federal awards. It submits the plan only if its cognizant agency asks.
Can a nonprofit use a cost allocation plan instead of a NICRA?
Nonprofits do not prepare Appendix V central service plans. They either negotiate an indirect cost rate from an Appendix IV proposal, use the de minimis rate of up to 15 percent, or charge shared costs directly using a documented, consistent allocation method.
Sources
- eCFR, 2 CFR 200 Appendix V, State/Local Governmentwide Central Service Cost Allocation Plans, up to date as of October 1, 2026. ecfr.gov
- eCFR, 2 CFR 200 Appendix VII, States and Local Government and Indian Tribe Indirect Cost Proposals, up to date as of September 29, 2026. ecfr.gov
- eCFR, 2 CFR 200.416, Cost allocation plans and indirect cost proposals, up to date as of October 8, 2026. ecfr.gov
- eCFR, 2 CFR 200.444, General costs of government, up to date as of October 8, 2026. ecfr.gov
- eCFR, 2 CFR 200.334, Record retention requirements, up to date as of October 8, 2026. ecfr.gov
- U.S. Department of Education, Indirect Cost Determination Guidance for State and Local Government Agencies, last reviewed January 14, 2025. ed.gov
- MRSC, Cost Allocation, no date shown. mrsc.org
- Washington State Auditor’s Office, Cost Allocation presentation, no date shown. sao.wa.gov
- Sage Intacct Help Center, Track statistical data overview, last modified October 1, 2026. intacct.com
- Sage Intacct Help Center, Dynamic allocations overview, last modified October 8, 2026. intacct.com
- Sage, Sage Intacct Dynamic Allocations product page (Sage sells this product), no date shown. sage.com
- Workday Administrator Guide, Reference: Basis Types, updated April 3, 2026. doc.workday.com
- Workday Administrator Guide, Enter Statistic Values, updated June 23, 2023. doc.workday.com
- Tyler Technologies knowledge base, Add Allocation Code (Munis), updated May 13, 2025. tylernow.atlassian.net
Sherman Hsieh
Independent analysis of enterprise software — ERP, CRM and more
