We found that three of the four NMED bureaus audited did not always comply with requirements found in the Code of Federal Regulations under 2 CFR Part 225. The Air Quality Bureau and Drinking Water Bureau charged labor, fringe benefits, and indirect costs to federal grants based upon budget allocations instead of actual activities performed. Personnel activity reports we received from the Surface Water Quality Bureau to support charges for labor costs incurred prior to July 2006 did not meet 2 CFR Part 225 requirements. Title 2 CFR Part 225 requires that where employees work on multiple activities or cost objectives, labor charges be based upon the after-the-fact distribution of an employee's actual activity and supported by employee-signed personnel activity reports or the equivalent. NMED personnel stated that they charged labor based upon budget allocations because they thought the practice was acceptable. NMED personnel also stated that the accounting system used for SWQB timekeeping before July 2006 is no longer accessible and that employee-signed personnel activity reports from this period are no longer available. We questioned $298,159 in labor, fringe benefits, and related indirect costs claimed by AQB; $2,974,318 claimed by DWB; and $2,733,798 claimed by SWQB. We also identified an additional $486,305 charged to a DWB-administered grant, which has not yet been reported to the EPA.