Welcome to this overview lesson on Federal Grants Compliance. This lesson will provide a high-level overview of the various compliance requirements you may encounter when implementing a Federal grant. This lesson discusses compliance by topic. Some topics or compliance items are not required of certain awarding agency programs or may be excluded by Federal law.

Before we jump into the compliance topics, let’s talk about the source of requirements for Federal grant compliance. Whether Federal law or awarding agency regulation, requirements are codified into the Code of Federal Regulations (CFRs) which are managed by the Office of Management and Budget (OMB). This is the primary source of your requirements under a Federal grant. The secondary source of requirements are you award terms and conditions which are primarily related to your grant. These include project objectives, management requirements such as prior approvals, and reporting. One thing to note about your award terms and conditions is that this is where you will find the requirement to follow the uniform guidance for grants at 2 CFR and any other applicable CFRs.

2 CFR is an extensive publication covering many topic areas. We will cover this publication in the lesson on Federal grant regulations and uniform guidance. This lesson provides an overview of these CFRs using the topic areas you will find in the annual OMB compliance supplement that provides guidance for grant auditors and organizations implementing internal controls for compliance. These topic areas include:

• Allowed and Unallowed Costs and Allowable Costs/Costs Principles

• Cash Management

• Eligibility

• Equipment and Real Property

• Matching, Level of Effort, Earmarking

• Period of Performance

• Procurement and Suspension and Debarment

• Program Income

• Reporting

• Subrecipient Monitoring

• Davis-Bacon and Related Acts (DBRA)

• Special Tests and Provisions

Allowed and Unallowed Costs and Allowable Costs/Cost Principles

The CFRs lists two types of costs. Simply, the costs you incur on your grant are either allowable or unallowable.

• Allowable

• Unallowable

Generally, unallowable costs are specified in the CFRs. For example, under “Alcohol” it says, “not allowable”. Some cost may be allowable under certain circumstances.  An example of this is advertising. Advertising is allowable when used to find subjects for research. It is not allowable when advertising that your company is implementing a grant.

To be allowable a cost must also be:

• Reasonable, and

• Allocable

Reasonable means you are not paying a higher price for something that you could find in the marketplace. Allocable means it is a cost that can be placed on a budget or in an invoice. For example, you cannot bill for 3 hours of a classroom. But you can bill $900 (classroom for 3 hours at $300).

Cash Management

In 2 CFR 200 there are guidelines governing transfers of funds for either reimbursement or advanced funding for disbursement. Recipients other than states, and some cities, generally don’t mix the two types of distribution of funds. There are rules to follow for handling of advanced funds which require forecasting for immediate case needs and reconciliation for accuracy of the drawdown. 

What a grant manager should know is that you should not be compelled by a subrecipient to receive advanced funds because they are short on cash. The purpose of advanced funding is to support the public in cases such as a natural disaster and not to support the cash flow of a subrecipient.

Eligibility

What you need to know about eligibility is that any recipient such as a subrecipient or member of the community you serve must be eligible to receive grant funds. Eligibility for a project subrecipient includes, but is not limited to, review of Single audits, SAM registration, suspension and debarment, and risk assessment. There may be other program criteria that must be applied to a subrecipient as well. For members of the community, there are likely awarding agency program guidelines and recipient criteria specified in your award. In some cases, the prime recipient or subrecipient defines the criteria for distribution to the public.

Equipment and Real Property Management

Although the compliance supplement addresses only equipment and real property, this topic should also include supplies and intangible property.

Here’s the overarching rules that apply to equipment, real property, and intangible property. They all allow you to retain title to the property but the hook is that the Federal government retains rights equal to what they contribute. On a 50% cost share grant the Federal government has the right to compensation of 50% of what you sell the property for after the grant. Of course, if you have a building and use the grant for upgrades or improvements then the 50% share would only apply to what was grant funded (e.g., HVAC). Before disposing of property, you are required to get awarding agency approval. While you have the property, you must protect it from loss, maintain it sufficiently, and only use it for the program or project it was acquired for, and you cannot encumber the property. One more thing, these rules apply forever, or until the Federal government extinguishes their rights to it.

Now, let’s look at some requirements that are specific to each type of property:

Equipment

There is a threshold value for determination. This is the lesser of $5,000 or your organizations’ capitalization level. It also must have a useful life of more than one year. Under these parameters it’s considered a supply. Your grant agreement will have reporting requirements you must follow during closeout. While you own the equipment you are required to conduct a physical inventory every two years until the fair market value goes below the requirement threshold.

Real Property

Real property requires an in-depth analysis of the requirements surrounding the update or acquisition of real property. The requirements will likely be spelled out in your NOFO.

Intangible Property

Although the requirements are similar to equipment, there are a several rules that apply to intangible property:

• The Federal government has rights to the work product and data. So they will have the right to reproduce, publish or use research data and reports for Federal purposes. They also have the right to allow others to use intangible property for Federal purposes.

• You will still own the intangible property and are allowed to copyright it.

• You will be subject to the Federal Freedom of Information Act (FOIA) rules with some limitations.

• There are special rules that applies to nonprofit organizations and small business.

Supplies

It’s common to acquire supplies to support a grant. There’re a couple things you need to know. At the end of the grant, you must either use the remaining supplies for another grant, sell them, or compensate the Federal government. This applies if you have an aggregate value of supplies that exceed $5,000, based on fair market value. Here’s an important point, you must only use supplies you purchase to support your grant. For example, you cannot fill the office supply cabinet with grant purchased supplies that are used for non-grant work or even other grants.

Approving Matching, Level of Effort and Earmarked Funds

Matching, level of effort and earmarked funds have the same rules as Federal grant funds:

• Allowability and unallowability rules apply

• Costs must be supported by sufficient evidence. The old saying goes, if it isn’t documented, it didn’t happen.

The following additional rules apply:

• Funds from all sources must be used or burned at the same rate as all other funds. In other words, you will not be able to spend Federal money first then spend your contributed matched funds.

• The grant project manager must ensure that any matched funds used either by the prime or subrecipients are from non-Federal sources. Funds from other Federal grants cannot be used as matched funds.

Period of Performance

All involved in the administration, management and accounting of grants must know the date the grant award starts and the date it ends. Aside from that if costs are allowed before the grant or during closeout, you must also know those dates and what is specifically allowed. This seems like such a clear requirement but is one that is commonly violated.

Procurement and Suspension and Debarment

Anyone engaged in procurement activities must follow the 2 CFR 200 procurement rules. These include:

• General Standards for awarding to responsible contractors, providing contractor oversight, and restriction on time and material type contracts.

• Competition to ensure award is through competitive bid or follow rules for noncompetitive procurement.

• Awarding agency review of procurement documents when requested by the awarding agency. As a prime recipient you are allowed to make the same request of your subrecipient.

For a grant project manager, there are a couple of tasks that must be performed to ensure compliance. You must:

• Review applicable award agreements, contracts, budgets, and other appropriate sources to know what is required to be delivered for the grant. In other words, a working knowledge of the grant documents (agreement, budget, etc.) for the scope, schedule and budget and any subrecipient agreements or procurement contracts so you will know if a cost is invoiced that is not allowed.

• Ensure that goods and services received for the grant meet the standards agreed to by the contract or purchase order.

Program Income

This is a requirement for when you produce income from a grant activity.  Here’s an example. A few years ago, a grant was awarded for a local dairy to create a special type of dairy digester. The digester generated power which was sold to the local utility. The grant also involved some research and data collection after the facility went into operation. So, income was generated during the research part of the grant. That income was used to offset the amount of the Federal contribution. Two things you need to do:

• Determine if your grant project will generate income during the grant agreement.

• Ensure that program income is identified, recorded and correctly used.

Reporting

The reporting requirements involve knowing the terms and conditions of the grant, what is required by 2 CFR 200 and any other requirements such as DBRA for Federal prevailing wages. Grant agreements with large reporting requirements typically have an attachment that will outline the reporting requirements. This may not include all reporting so be careful when reviewing the attachment.

Reporting requirements include progress reports, research performance progress reports, special status reports, financial reports, and the closeout report. Other reports that may be required are the final research report, indirect cost report, and the Federal Funding Accountability and Transparency Act reporting.

Each report has specifications for content, submission, due dates, etc. If you receive a report for a third-party or subrecipient, make sure you review for completeness and accuracy, compare it to source documentation (general ledger, third party evidence or other reliable records) and any reconciliations between source data to final reporting.

To ensure all reporting requirements are met on time, we recommended the grant project manager or administrator maintain a reporting calendar and all reports (including subrecipients) are consolidated in a single location so they can be easily provided to an auditor.

Subrecipient Monitoring

Subrecipients must be monitored by the prime recipient to ensure program, award, project performance and financial and administrative regulatory compliance. Here’s the highlights of the monitoring requirements:

• You must “use judgement” when selecting a subrecipient. This means ensuring they are a subrecipient and not a contractor and that all the recipient requirements are passed through to them. Characteristics for selection is described in 2 CFR

• A risk assessment is required. In 2 CFR 200 “considerations” for the assessment are provided which includes prior experience, results of previous audits, recent changes in key personnel, financial stability, and management systems and standards.

• You are allowed to, and even encouraged, to add additional award requirements to monitor the performance of your subrecipient if they pose a high risk.

• As a prime recipient, you are required to conduct ongoing monitoring of your subrecipients. This includes reviewing audit reports, following up on findings, issuing management decisions on those findings, ensuring audits are performed as required, updating records, if needed, due to audit findings, and determining what remedies, such as terminating the subrecipient, is needed to remedy noncompliance.

Prevailing Wage

Some Federal grants include terms for compliance with the DBRA. These are Federal acts that requires payment of prevailing wage on a public project. This should not be confused with any state level prevailing wage requirements. States, such as California, publish prevailing wage rates and procedures to follow to report payment of these wages to their employees. The Federal government also has prevailing wage rates for various trades and your grant agreement will provide guidance for compliance. Here's some things you need to know if Federal prevailing wage applies to your grant:

• The awarding agency should provide wage determination with your grant agreement documents.

• If required, the subrecipient agreements and procurement contracts must include the Federal Davis-Bacon Act terms.

• You will be required to collect certified payroll reports which are different than ones that are submitted for state requirements. You should enlist some administrative help to collect and review the Federal required certified payroll reports.

• There will likely be a requirement in the grant terms that will require you to keep the certified payroll report for three years after the grant.

• This is one compliance area that is closely reviewed by the auditors during the Single audit.

Special Tests and Provisions

In 2 CFR 200 there are requirements listed under special tests and provisions for compliance where an auditor will review your Federal grant program. One such area is for research and development programs.

If you are engaged in a research and development program, there's some things you need to know. There may be slightly different compliance requirements. But here's what is most important. Even though you may call your project research and development, it may not be considered that by the Federal government. This is one thing you should check before starting the grant. Why? If your project is R&D per the awarding agency, then you may not be subject to audit in these areas:

• Eligibility

• Matching, Level of Effort, Earmarking

• Program Income

• Reporting

This doesn't mean you wouldn't have to comply with the Federal regulations but simply you wouldn't have exposure and possibility of a finding from your auditors.

We have covered the main compliance areas you should know about when receiving a Federal grant. There are a few takeaways from this lesson:

• 2 CFR 200 provides a lengthy description of costs that are allowable and unallowable with requirements for allowability.

• Equipment, real property and intangible property all have ongoing requirements after the grant such as getting approval before you dispose of an item and paying back the percentage contributed by the awarding agency.

• Federal grants may have extensive reporting requirements. Not all may be listed in the agreement but may only be referenced.

• There are selection risk assessment and monitoring requirements when you have a subrecipient.

• DBRA has many elements to compliance that are closely reviewed by auditors.