Redstone Government Consulting Blog | Grants & Cooperative Agreements (2 CFR 200) (2)

Grants are complex and the regulations in 2 CFR 200 Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards aren’t exactly straight forward and easy to understand. When you receive a grant, you are expected to have internal controls in place such as policies and procedures, segregation of duties, timekeeping, documentation requirements, etc. If you do not have internal controls, you will need to implement them as soon as possible after award. While anyone can make mistakes, you don’t want continuous errors, overbillings, billing of unallowable costs to become significant noncompliance issues requiring corrective action or even the appearance of alleged fraud.

For-profit organizations that receive grants must establish a cost accounting system that complies with the Cost Principles in FAR part 31.2, read our article Which Cost Accounting Regulations Apply When You Have Grants and Federal Contracts. Additionally, a for-profit organization with a grant must also comply with the 2 CFR 200 Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards and agency supplements for all other requirements under the grant, cooperative agreement, or subaward. While there are similarities between the FAR and 2 CFR 200 requirements – for example: written policies and procedures, accounting by project, and timekeeping practices, there are differences as well – the requirement for audit is one.

You are putting together a proposal in response to a Funding Opportunity Announcement (FOA) for a grant or cooperative agreement. It’s pretty simple. Just estimate direct labor, equipment, other direct costs, and my indirect rates. Correct? Well, maybe, but your indirect rates can be complex.

The Office of Management and Budget (OMB) issued a final rule revising 2 Code of Federal Regulations (CFR), now called OMB Guidance for Federal Financial Assistance, to streamline and clarify the rules for federal financial assistance (e.g., grants and cooperative agreements). Agencies must implement the Final Rule by October 1, 2024. These rules will apply to new grants and can be applied to existing grants by a bi-lateral modification. Although OMB indicates that agencies may apply the new rules beginning June 21, 2024, we believe most federal agencies will wait so that both the agencies and the recipients have time to read and digest some of these updates.

Current FAR Requirements

Federal Acquisition Regulations (FAR) 42.101 provides that normally, “the Defense Contract Audit Agency (DCAA) is the responsible Government audit agency.” While DCAA’s website states “DCAA provides audit and financial advisory services to DoD and other federal entities responsible for acquisition and contract administration.” DCAA only has appropriated funds to provide services to the Department of Defense (DoD). All other federal agencies must pay for DCAA services. This can make a decision related to the necessity of an audit service a budget-based decision. Today, DCAA is current on the required incurred cost audits of contractors with DoD contracts, but contractors with mostly National Aeronautics and Space Administration (NASA) contracts are years behind in their required incurred cost audits. If, as the FAR states, “DCAA is the responsible Government audit agency,” why is it not a Federal audit agency (dare we say – FCAA)? This would make things much easier for NASA and other federal agencies that need their contracts audited. However, given that this isn’t the case, DCAA is not the only option for federal agencies. Many agencies other than DoD have contracted with third-party CPA firms to get necessary audits performed.

Suppose your company is working on a grant or cooperative agreement or planning to submit a proposal in response to a funding opportunity announcement. In that case, the regulations that apply will be Code of Federal Regulations (CFR) Title 2 Grants and Agreements. The problem is, when you receive a grant, generally, the award agreement says to comply with 2 CFR. There are no specific clauses or wording; basically, you are responsible for reading the entire regulation to see what applies to your award. 2 CFR includes inconsistent language and terms.

In our article, Understanding your Lower-Tier Relationships with Subrecipient and Contractor Determinations under 2 CFR 200, we addressed the required determination as to whether the lower-tier organization supporting your Awards or Subawards are classified as subrecipients or contractors. Now that the determination is made and documented is that all that needs to be done? Well no.

2 CFR 200.331, Subrecipient and contractor determinations, requires that an organization performing a grant or cooperative agreement document a case-by-case determination as to whether each sub-agreement it makes classifies the lower-tier organization in the role of a subrecipient or a contractor. The guidance provided to assist with this required determination is extremely subjective.

2 Code of Federal Regulations (CFR) 200 lays out the Procurement Standards (i.e., purchasing system requirements) in section 317 to 327. 2 CFR 200.317 (Procurement by States) requires State Governments making purchases under Federal awards to use the same policies and procedures it uses for placing purchases when it spends State funds. 2 CFR 200.318 (General Procurement Standards) relates to non-Federal entities[1] other than State Governments. This section requires the non-Federal entity to have and use documented procurement procedures, consistent with laws and regulations and conform to the procurement standards identified in §§ 200.317 through 200.327.

Organizations receiving Federal awards (i.e., grants or cooperative agreements) are required by 2 CFR 200.303(a) to “[e]stablish and maintain effective internal control over the Federal award that provides reasonable assurance that the non-Federal entity is managing the Federal award in compliance with Federal statutes, regulations, and the terms and conditions of the Federal award.” This section goes on to provide that the internal controls should comply with the guidance in: