I've been following this thread with interest.  We had a similar situation
that caused a mountain of paperwork for $250 @ for a small number of faculty.
There's also another aspect to this discussion.  How did this proposal get
submitted without all this having been resolved at the budget or signoff
stage?  I recall the wording of the original post was something to the effect
that the faculty member brought in this grant, which then caused all the
discussion.  My guess is that the proposal never went through the routine
submission procedure.  This is a prime example of why faculty need to work
through the sponsored projects office - if in fact my hunch is correct.  I'm
interested to know if anyone has any real sanctions when this happens.  In most
cases, we tend just to make the best of a sticky situation.  Only once in my
career did we recall a fugitive proposal-because the Dean who submitted it
(yes, ... Dean) sent a request to a foundation our President was courting. The
Provost called in the Dean and with as much control as possible at that point
said, "No discussion - just withdraw it. Bye."  But pulling them back is a
rare event.
Andrew Grant
Rearranging the Deck Chairs on the Titanic