I'm not sure if this is common practice or not, but much like how we see co-authorship in research papers, I was wondering if an undergrad would be allowed to collaborate with other students (possibly from other institutions) for their research project?
Undergraduates are definitely allowed to collaborate with other students (undergraduate/graduate) for their senior thesis/research project/dissertation etc.
Of course, the degree to which they can successfully collaborate depends on many things including their faculty adviser.
For instance, as an undergraduate I collaborated with students from Civil Engineering/Construction Management and used some of the results we obtained in my undergraduate thesis.
Currently, I am a doctoral candidate and I have worked with undergraduates in the past whose thesis has sprouted from the results of our active collaboration in a project.