Grants Resource Center

The attorneys of the Federal Grants practice of Feldesman Tucker Leifer Fidell LLP have prepared this Grants Resource Center as a complimentary public reference. We have unique expertise in pre-and post-award matters, such as financial and program requirements, procurements, property, termination and enforcement, as well as how best to prepare for and respond to government reviews, audits, and cost disallowances. Feel free to contact us any time at (202)466-8960 or at grantslawgroup@ftlf.com.

Grant Basics

Grants are important for many reasons. First, grants provide much needed funding to organizations that are set up to do certain types of work. This means that the Federal Government does not need to create a new organization or agency to accomplish its objective. Second, since the grantee is not actually a part of the Federal Government, laws and policies that govern (and may restrict) governmental agencies do not apply. In other words, the grantee is considered autonomous, not an arm of the Federal Government. However, it is important to note that grantees are not entitled to the protections that Federal Government agencies may receive, either.

Grants, cooperative agreements, and contracts have a lot in common, but they also have distinct differences. Many things, including legal implications, are determined by how a federal agency sets up its agreement with a recipient of funds and what they call that relationship.

Grants:

Used when the principal purpose of the relationship is “to transfer a thing of value” (e.g., money, property, or services) to the recipient “to carry out a public purpose of support or stimulation authorized by a law…” Substantial involvement “is not expected” between the agency and the recipient while carrying out the funded activity.

Procurement Contracts:

Used when “the principal purpose of the instrument is to acquire (by purchase, lease, or barter) property or services for the direct benefit or use of the United States Government” or whenever an executive agency determines in a specific instance that the use of a type of procurement contract is appropriate.

Cooperative Agreements:

Much like grants, used when the principal purpose of the relationship is “to transfer a thing of value” (e.g., money, services, or property) to the recipient “to carry out a public purpose of support or stimulation authorized by a law…” Unlike grants, however, “substantial involvement is expected” between the agency and the recipient when carrying out the contemplated activity.

Differences between Grants and Contracts

Grants and cooperative agreements are substantially similar in nature and are treated as such by OMB circulars. A procurement contract, however, is a very different funding mechanism from the other two.

A grant is a form of assistance to a designated class of recipients authorized by statute to meet recognized needs, while a contract involves the purchase of a product or service for federal use or, as stated in the Federal Grant and Cooperative Agreements Act, for the direct benefit of the government.

In other words, the chief distinction between grants and contracts is in the nature of the “deliverable” under the funding instrument – “grantees” agree to provide a good or carry out a service on behalf of or in the stead of the federal government, whereas contractors agree to provide a good to or carry out a service for the federal government.

The second major difference between grants (including cooperative agreements) and procurement contracts is in the rules that govern implementation and administration of funded activities.

Contracts are subject to the Federal Acquisition Regulation at Title 48 of the Code of Federal Regulations. Grants are governed by the “common rules” in the OMB Circulars as incorporated into grantor agency regulations.

Legal Implications of the Differences

In light of the various distinctions between grants and contracts, courts have held that certain generally recognized rules of contract law do not necessarily apply in the grant context. For instance, courts and other tribunals have refused to apply the contractual doctrine of “impossibility of performance” to a grant, and have concluded that an ineligible grantee could not be reimbursed for expenditures under equitable “quantum meruit” principles. Courts are also reluctant to apply the “contract implied in fact” concept in the grant context, largely because a grant is a “sovereign act” to which the government is bound only to the extent it has explicitly consented.

Types of Grants

There are a variety of types of grants the federal government provides. They can be mandatory or discretionary in nature. Mandatory grants may be further classified into block grants, open ended, or close ended. Direct grants may be mandatory or discretionary.

Mandatory Grants

In a mandatory grant program, Congress directs awards in specific amounts to one or more classes of prospective recipients that meet specific criteria for eligibility. These grants are usually awarded on the bases of formulae prescribed by statute or regulation rather than on the basis of an individual project review. In other words, “mandatory” means just that – applicants need not compete for funds but instead need only demonstrate that they meet the relevant eligibility criteria to establish their entitlement to funding.

Mandatory grants are typically awarded to state governments and sometimes to other entities. Mandatory grants include block, open-ended, and close-ended grants.

Block Grants:

Unlike direct grants, block grants are programs for which the federal government gives states, localities, or regional entities a fixed amount of funds that they, in turn, distribute to other entities for the purposes of performing program services. Block grants are designed to offer grantees flexibility in designing programs, targeting resources, and devising administrative mechanisms to provide services to meet specific needs.
“Block grantees” have substantial discretion in decisions relating to supported activities, with relatively minimal federal oversight or administrative restrictions. After the federal government has given funds to the block grantee, the grantee takes on primary responsibility for setting up procedures for the disbursement of funds to eligible entities for the purpose of implementing the federal program goals.
Typically regarded as mandatory grants to states, some block grants consist of what had been several smaller, specific-purpose grants consolidated into one “block.” Block grants usually provide greater flexibility of use of the provided funds and place fewer federal administrative restrictions on the recipients.

Open-Ended Grants:

An open-ended grant is a type of mandatory grant where the legislation authorizes appropriation of funds sufficient to pay a set portion of the recipient’s (normally state’s) total cost without an upper limit, hence “open-ended.” Open-ended grants are sometimes referred to as “open-ended entitlement grants,” due to the entitlement of individual citizens to funds under the awards.

Close-Ended Grants:

A close-ended grant is a type of mandatory grant where the award constitutes an upper limit on the amount of funds the federal government may pay for the activities, hence “close-ended.”

Discretionary Grants

A discretionary grant is awarded on the basis of a competitive process. The federal government uses discretionary grants to fund program activities when it is appropriate and essential for the government to identify the best possible projects to achieve particular program objectives.

Discretionary grants are awards that permit the Federal government, according to specific legislation, to exercise judgment (discretion) in selecting the project or proposal to be supported and selecting the recipient organization through a competitive process. The award amount is determined either through a negotiation agreement between the recipient and the grants office/program office or an a formula basis. Discretionary grants are also referred to as “project” grants. Additionally, the funds for these programs are appropriated annually at the discretion of the Congress. Discretionary rants and cooperative agreements are used to support demonstration, research, training, service, construction, and conference projects.

How the Application Process Works for Discretionary Grants:

Prospective grantees apply directly to the federal governmental agency charged with administering the program. The agency reviews applications in light of relevant legislative and regulatory requirements, published selection criteria, and the relative strength of those applications. The review process gives the agency discretion to determine which applications best address the program requirements and are, therefore, most worthy of funding.

Direct Grants

Direct grants involve a funding relationship directly between the federal government and an end-user grantee responsible for carrying out the public purpose for which the grant program is established. Direct grants may be mandatory or discretionary but in all cases are founded upon a funding agreement to which the federal grantor agency and the grantee are parties. The grantee, in turn, is directly accountable to the federal government for the implementation and management of the grant.

Features of Grants

There are a number of features common to all federal grant programs.

First, grantees are not – by virtue of receiving grants – arms, agents, or agencies of the United States. They are independent entities. Grantee operations are subject to federal legal and regulatory requirements only

as specified in the terms and conditions of the grant award, and
to the extent that they would be were no federal funds involved.

Grantees are not bound by the same rules applicable to the Federal government in matters of employment, contracting, and administration. By the same token, grantees do not enjoy many of the protections that Federal agencies enjoy.

Second, all Federal grant programs are subject to a common foundation of governing rules found primarily in “circulars” promulgated by the White House Office of Management and Budget (OMB). These circulars lay out “common rules” applicable to all grants in the areas of administration (OMB Circulars A-102 and A-110), cost principles (OMB Circulars A-21, A-87, and A-122), and audits (OMB Circular A-133). The circular applicable to a particular organization depends on the nature of the organization. For example, OMB Circular A-21 provides the cost principles for colleges and universities, while A-122 sets forth cost principles for nonprofit organizations and A-87 does the same for state, local, and tribal governments. Similarly, the uniform administrative requirements in OMB Circular A-102 apply to state, local, and tribal government grants, while A-110’s administrative requirements apply to colleges and universities, nonprofit organizations, and hospitals. The audit requirements under OMB Circular A-133 apply to all grantees regardless of organizational structure.

Third, there is a common foundation of legal principles announced in federal judicial decisions over the past few decades. For example, courts have held that grant conditions and obligations must be explicit and cannot attach “by implication,” that changes in substantive requirements for a federal grant program generally cannot attach retrospectively and that a grantor agency may not impose “unconstitutional conditions” on a grantee’s access to federal funds.

Key Federal Actors

Key actors in the Federal Grants world include the Grants Officer, the Program Officer, the Cognizant Agency, the Office of Inspector General (OIG), and the Government Accountability Office (GAO).

Grants Officer

The individual designated to serve as the agency official responsible for the business management aspects of a particular grant(s) or cooperative agreement(s). The Grants Officer serves as the counterpart to the business officer of the recipient organization. In this capacity, the Grants Officer is responsible for all business management matters associated with the review, negotiation, award, and administration of grants and interprets grants administration policies and provisions. He/she works closely with the program or project officer who is responsible for the scientific, technical, and programmatic aspects of the grant.

Program Officer

Sometimes referred to as the Project Official, the Program Officer is the individual designated as the official responsible for the programmatic, scientific, and/or technical aspects of agency programs. He/she serves as the counterpart to the agency’s Grants Officer who is responsible for all business management aspects of a grant.

Cognizant Agency and the Division of Cost Allocation Officer

The individual responsible for negotiating and approving rate(s) that should be used to determine amounts of indirect, fringe benefit and other types of costs to be included on a federal award. The approval is formalized by issuance of a Rate Agreement signed by the cognizant agency and an authorized representative of the organization.

Office of Inspector General

The OIG is an independent office that keeps the agency head and the Congress fully and currently informed about problems and deficiencies relating to the administration of agency programs and operations and the necessity for and progress of corrective action. The OIG conducts and supervises audits and investigations relating to the programs and operations of the federal agency it serves. The OIG also provides leadership and coordination and recommends policies for activities designed to (a) promote economy, efficiency, and effectiveness in the administration of the agency, and (b) to prevent and detect fraud and abuse in agency programs and operations.

Each large agency has an Inspector General (IG) appointed by the President with the advice and consent of the Senate (smaller agencies have IG’s appointed directly by the head of the agency).

The OIG conducts audits and investigations of not only grantees, but also of grantor agencies. OIG auditors make findings and recommendations, but do not implement program recommendations. Auditors are trained to identify fraud and will refer possible fraud situations to the Office of Investigations.

Government Accountability Office and Comptroller General

The Comptroller General heads the GAO and is appointed by the President with the advice and consent of the Senate for a 15-year term. The GAO evaluates federal programs, audits federal expenditures, and issues legal opinions on all matters related to the receipt, disbursement, and use of public money; analyzes executive agency expenditures to help Congress determine whether money is expended economically and efficiently; and issues Government Auditing Standards also known as the “Yellow Book.”

Responding to Audits and Reviews

Generally, Federal government grant programs hold recipients accountable for the efficiency and effectiveness of their grant-supported projects. As such, grantees may be subject to periodic audits or "reviews" designed to ensure that the grantee is meeting certain performance or financial standards.

Audits are conducted by the Office of the Inspector General (OIG), and they can occur randomly or as a result of a complaint or whistleblower. The OIG was created by the Inspector General Act of 1978 to establish independent and objective units to carry out audits and investigations of programs and agencies, to provide leadership and policy recommendations on efficient and economic adminsitration, including the prevention of fraud and abuse, and to keep Congress informed in the administration of executive branch agencies. The OIG is responsible for carrying out its audit and investigation functions objectively and independently.

Organizations can take certain steps to prepare for an audit.

Pre-Audit

Designate a Point Person to Coordinate External Audit Activites; If Necessary, Obtain Counsel
Develop and Establish Appropriate Response Procedures

Once Notified of an Audit

Request a Detailed Explanantion of the Scope and Purpose of the Audit
Conduct an Enterance Conference
Comply with Requests for Documents, Interviews, and Testimony
Conduct an Exit Interview

After the Audit

Review the Government's Reports
Address Adverse Findings
Develop and Implement Corrective Action Plans

Types of Disputes

Disputes and Interpretation of Terms & Conditions

Grant related disputes may be programmatic, financial, or may fall into another category altogether.
Programmatic disputes include suspension or termination of funding.
Financial disputes, which are typically resolved through audit proceedings, are often a result of cost disallowances.
Additional types of disputes include declaratory actions and debarment and suspension. Disputes may be adjudicated in administrative agency proceedings, U.S. District Court, or the U.S. Court of Federal Claims.

Cost Disallowances and Debt Establishment

Cost disallowance occurs when a grantee spends money in a way not permitted by the grant agreement or federal law. Be sure to refer to the appropriate cost circular often in order to determine if your costs are:

Allowable
Allocable (meaning it is identifiable and has documentation in support); and
Reasonable

The cost principles applicable to a non-Federal entity apply to all Federal awards received by the entity, regardless of whether the awards are received directly from the Federal Government or indirectly through a pass-through entity. The circulars describe selected cost items, allowable and unallowable costs, and standard methodologies for calculating indirect costs rates. You can find what types of costs are alowed under each circular here.

Debarment and Suspension

By Executive Orders and public law, Federal debarment and suspension applies across all agencies. However, individual departments have codified rules relating to debarment and suspension.

Debarment may be based on criminal conviction or other activities “affecting the integrity of an agency program,” whereas suspension is temporary pending completion of investigation or other administrative proceeding. Indictment is adequate evidence for suspension.

Both debarment and suspension are appealable, although there is no opportunity to contest earlier grounds for conviction.

OIG Audits

The Single Audit Act and OMB Circular A-133

The Single Audit Act of 1984 established requirements for audits of States, local governments, and Indian tribal governments that administer Federal financial assistance programs. In 1996, the Single Audit Act was amended to extend its statutory reach to non-profit organizations. Pursuant to the Single Audit Act, OMB has issued rules and guidelines advising grantees, auditors, and grantor agencies of their responsibilities in connection with annual financial and compliance audits. Those rules and guidelines are found in OMB Circular A-133, which applies to Institutions of Higher Education; Non-Profit Organizations; and States, Local Governments, and Indian Tribal Governments.

Subpart B of OMB Circular A-133 contains the basic requirements for audits. Entities that expend $500,000 or more in federal awards in a year must have an audit for that year; this is known as an annual audit report. Entities below the $500,000 threshold must maintain their records for review or audit by the awarding federal agency, pass-through entity (a nonfederal entity that provides a federal award to a sub-recipient to carry out a federal program), or the GAO.

A-133 Compliance Supplements

A-133 compliance supplements are issued annually to identify existing important compliance requirements outlined by the Single Audit Act by providing an updated source of information for auditors to understand various Federal programs' objectives, procedures, and compliance requirements relevant to the audit's objectives. The use of the compliance supplement for audit procedures is mandatory and satisfies the requirements of OMB Circular A-133. The most recent compliance supplement was issued in March 2009, and can be found here.

While Federal agencies are required by A-133 to provide OMB with any necessary changes to the supplement, auditors and grantees alike should be aware of any intermediate changes and updates in compliance requirements. For example, the 2009 compliance supplement states that the Recovery Act has “significant implications” for audits performed under OMB Circular A-133, and that “auditors should specifically ask auditees about and be alert to recipient and subrecipient expenditure of funds provided by the Recovery Act.” Unfortunately, due to the limited time between the enactment of the Recovery Act and the issuance of the supplement, it has not been updated for revisions needed due to the Recovery Act.

Appendix VII of the supplement highlights some areas of ARRA impacting audits under A-133, including Catalog of Federal Domestic Assistance (CFDA ) numbers, program clusters, the effect of Recovery Act awards on major program determination, award terms and conditions and compliance requirements, and the Schedule of Expenditures of Federal Awards. As additional information becomes available, OMB plans to issue addenda to the supplement.

Types of Audits

Audits by the Offices of Inspectos General ("OIG") audits examine an organization’s records and activities to ensure that finances are are in order and that programs are being conducted according to the agreement and federal law. If the OIG determines an audit is necessary, it must establish the type of audit to be performed and the audit’s scope. There are financial audits and performance audits.

Financial audits examine whether a grantee’s fiscal records are properly presented.
Performance audits, on the other hand, focus on integrity, compliance, and effectiveness; in other words, they determine whether a program is meeting its set goals.

Each Audit Goes Through a Series of Steps:

Notification Letter – The OIG usually notifies the auditee of the audit in advance, but it is not required to do so.
Survey – During this phase, the auditor familiarizes him or herself with the operations of the auditee.
Developing the Audit Program – This is essentially the agenda for the audit. A plan is drawn up stating what work will be done, and who will do it, attempting to ensure that all bases are covered.
Entrance Conference – This is a forum in which the auditee is made aware of the Audit Program and has the opportunity to ask questions.
Fieldwork – This is when the audit work actually takes place.
Exit Conference – During this phase, a draft copy of the audit report is circulated and the findings are discussed with the auditees. The descriptions of the reporting phases necessary for an audit are found in the OIG Reports section.

OIG Investigations and Inspections

The Offices of Inspectors General have the right, under the Inpector General Act ("IG Act"), to conduct investigations of recipients of federal funds for suspected criminal fraud, civil fraud, and false claims.

An investigation is “a planned, systematic search for relevant, objective evidence derived from individuals, documents, tangible objects, and data.”

Investigations are usually triggered by a complaint or an allegation of wrongdoing. A complaint will not automatically give rise to an OIG investigation; the complaint must suggest, for example, that there is a significant chance of statutory violation or health and safety endangerment. There is also the possibility that the complaint will be referred to another agency or recorded for future audits.

An investigation is not as thorough as an audit; rather, it is a fact-finding endeavor as opposed to a solution-creating process. However, the OIG has a wide-reaching authority to examine a grantee’s records. Not only does the OIG have access to documents and personnel within the program, but it also has subpoena power to obtain documents outside of the federal government.

Possible signs of an OIG Investigation

Planned audit;
Visit by government agents to the organization or to current or former employees at work or at home;
Informal request from the OIG to review certain records;
OIG subpeona;
Civil investigative demand;
Grand jury subpeona; and
Search warrant for the organization.

While OIG inspections are not mentioned in the IG Act, they are still important to be aware of and know about. Only some agencies have instituted processes for these inspections.

OIG Reports

The Offices of Inspectors General ("OIG") conduct various reports on recipients of federal money to make sure that the money is being spent properly and responsibly.

These are the phases of an audit that involve reporting:

Draft Report – The draft report is not a public document; comments from auditees are requested within 30 days.
Final Report – The final report is a comprehensive document incorporating not only the purpose and finding of the audit, but also the comments by auditees and suggestions for corrective action.

Audit Resolution Process

After the exit conference, the auditee will likely need to make changes in its financial practices and/or program procedures. The resolution process includes the steps the auditee must take to comply with recommendations from OIG. The auditee must provide a plan for corrective action to the OIG within 180 days of the issuance of a Final Audit Report. Not more than one year after the Final Audit Report, and once all of the corrective actions have been taken, the auditee must submit a Notice of Final Action to the OIG.

Semi-Annual Reports to Congress

In order to assist the OIG in carrying out its audit functions, and with the idea of ensuring accountability of the OIG, the Inspector General Act ("IG Act") requires the OIG to submit semi-annual reports to Congress and the public. The OIG’s Semi-Annual Report to Congress profiles the activities of the OIG and provides statistics ad summaries of OIG activity over six-month periods ending March 31 and September 30. Section 5 of the IG Act contains the reporting requirements for the Semi-Annual Report.