If you only have FAR-based contracts, you only have one set of regulations to follow – Federal Acquisition Regulations. But what happens if you have both FAR-based contracts and grants? Grants are covered under a whole different set of requirements in 2 CFR 200 Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards. Let’s walk through some of the differences.
What Regulations Apply?
Under FAR-based contracts, the Federal Government issues contracts to prime contractors for goods and services. Prime contractors issue subcontracts to vendors/suppliers/subcontractors. FAR-based contracts include the applicable provisions and clauses in FAR Part 52, and prime contractors will flow down the applicable clauses from the prime contract to subcontracts depending on the type of subcontract, dollar amount, and other requirements (e.g., cost accounting standards, truthful cost or pricing data act (aka, TINA), service contract act, etc.).
Under grants and cooperative agreements, a Federal Agency awards a grant or cooperative agreement to a recipient (also called a pass-through entity if the recipient involves other organizations under the award) to carry out a public purpose in support of a federal program. Grants can be awarded by states, private foundations, or companies, but this article is focusing on grants from the Federal Government.
Grant award documents generally include a one-line statement to comply with 2 CFR 200, unlike the FAR which requires the inclusion of specific FAR clauses to follow. This means you have to read all of 2 CFR 200 to understand the requirements you must comply with. Not only is 2 CFR 200 lengthy, but it has sections that can be interpreted in different ways and uses inconsistent terms. This would be similar to a contracting officer awarding a prime contract and stating to follow FAR Part 52.
Grants Don’t Have Subcontracts Per Se
Recipients issue subawards to other organizations to carry out a portion of the award or contracts to suppliers for goods or services that are ancillary to the grants (e.g., transportation, microscopes, petri dishes, etc.). The recipient of a grant will flowdown the 2 CFR 200 regulations to a subaward and some of the requirements to a contract. If you're unsure how to distinguish between subrecipients and contractors under 2 CFR 200, read our article “Understanding your Lower-Tier Relationships with Subrecipient and Contractor Determinations under 2 CFR 200.” Subawards are subject to all of the regulations in 2 CFR 200. Contracts under grants are subject to certain parts of 2 CFR 200 (e.g., Davis-Bacon Act, Contract Work Hours and Safety Standards Act, etc.).
Confusing Terms
As we said earlier, the term “contract” can be confusing to someone who has been working under the FAR for many years. A FAR-based contract is not the same as a contract awarded in support of a grant.
In addition, while recipients issue subawards and contracts, unfortunately, the term subcontract is often used to describe a subaward or contract. Since there are different terms and conditions for a subaward and a contract under 2 CFR 200, it is important that you understand the classification of the agreement.
Will I Receive Profit or Fee?
Although there may be statutory limitations, FAR-based contracts, and subcontracts allow for a reasonable profit or fee, grants do not. Grants are generally cost-reimbursable, and there is no fee allowed on grants or any subawards under the grant. If the recipient issues a “contract” under a grant for goods and services, a reasonable profit can be added.
For-profit businesses need to understand the impact of no profit/fee, mainly that the unallowable costs often covered by profit/fee will not be covered.
Is There a Ceiling on Costs?
Under FAR-based cost-reimbursable contracts, there is a funding limitation on the contract. The cost limitation is monitored in total, not by cost element.
When it comes to grants, a budget is established by cost element categories (i.e., personnel, fringe, equipment, other direct cost, indirect costs, etc.). The recipient is limited to the annual budgeted amounts by cost element. For more information about how indirect rates play a role in grant budgets, refer to “Indirect Rates for Grants and Cooperative Agreements” and “Understanding Indirect Costs Under FAR and 2 CFR 200.” Additionally, in most cases, the Federal agency restricts the transfer of funds among direct cost categories to 10 % or a lesser amount in the award document. When submitting invoices, the recipient has to manage the costs by budgeting/funding line items.
Some Good News When it Comes to Which Cost Principles Apply?
The cost principles are applied to a FAR-based contract or a grant depending on the type of entity for profit or other than for-profit (i.e., non-profit, educational institution, state and local government). For help understanding which regulations apply when you have both types of awards, read “Which Cost Accounting Regulations Apply When You Have Grants and Federal Contracts.”
A for-profit entity will follow the cost principles in FAR part 31.2 whether they are awarded a FAR-based contract or a grant. A non-profit entity (or other than for-profit) will follow the cost principles in 2 CFR 200 Subpart E for a FAR-based contract or a grant.
The cost principles provide the Government’s expectations of an entity’s cost accounting system, including the classification of costs as direct vs. indirect. It also provides the requirements for allowability, allocability, and reasonableness of costs, whether the cost is proposed, billed, or claimed.
While you apply one set of cost principles, whether you have a grant or FAR-based contract, you are still required to follow the FAR regulations and the 2 CFR 200 regulations for other requirements (e.g., procurement/purchasing (discussed below), etc.) applicable to each type of agreement.
Are There Any Other Differences?
Unfortunately, the Government doesn’t let you use one set of procurement/purchasing rules for FAR-based contracts and grants. For a deeper dive into these distinctions, see “Purchasing and Procurement Requirements of FAR vs. 2 CFR 200” or our article on “Procurement Standards under 2 CFR 200 for Federal Grants and Cooperative Agreements”. There are two different sets of regulations for awarding a contract under a grant and FAR-based subcontract. The procurement regulations do not apply to subawards. The differences are significant enough that you will need to ensure your procurement procedures address the requirements for awarding both FAR-based subcontracts and contracts under grants.
Contractors with only FAR-based contracts are not required to obtain and provide audited financial statements to the Government agency. However, under a grant, if the total of your funds incurred on all of your Federal Awards exceeds $750,000 (but increated to $1 million for awards after October 2024 as a result of the Office of Management Budget (OMB) revision to 2 CFR 200), the organization is required to obtain a single audit (if other than for-profit) or a compliance audit (if for-profit).
Takeaway
If you are applying for a grant because you think it is free money and your company can handle it because you have FAR-based contracts under control, think again. The grant regulations in 2 CFR 200 are complex, and the problem is that when you are awarded a grant, you have to read the entire 2 CFR 200 regulations to understand the grant requirements. While one set of cost principles is used, the procurement procedures are different, cost limitations are by line item, invoicing, and reporting requirements are different, and audit requirements are different.
Expert Guidance for FAR and Grant Requirements
Redstone Government Consulting can support your company in navigating both FAR and grant compliance through a variety of services tailored to your needs. Our team can assist in developing comprehensive policies and procedures that address the requirements of both the Federal Acquisition Regulation (FAR) and 2 CFR 200 for federal grants. We can help you establish an accounting system that meets regulatory expectations and, if needed, provide ongoing monthly accounting services. Our experts also conduct cost or price analyses to support compliant pricing and proposal efforts. For companies managing federal grants, we offer assistance with post-award compliance activities, such as preparing quarterly SF-425 Federal Financial Reports and reviewing invoices for accuracy and compliance. In addition, Redstone offers both web-based and in-person training to ensure your team understands and adheres to the unique requirements of FAR and grant compliance.
Lynne is a Director with Redstone Government Consulting, Inc. providing government contract consulting services to our clients primarily related to Commercial Item Determinations and support, Cost Accounting Standards, DFARS Business System Audits, Proposals, and Incurred Cost. Prior to joining Redstone Government Consulting, Lynne served in several capacities with DCAA and DCMA for over 35 years. Professional Experience Lynne began her career working with DCAA in the Honeywell Resident Office, Clearwater, FL in 1984. Lynne’s experience included various positions which involved conducting or reviewing forward proposals or rate audits, financial capability audits, progress payments, accounting and estimating systems, cost accounting standards, claims and disclosure statement reviews. She is an expert in FAR, DFARS, CAS and testified as an expert witness. Lynne assisted in drafting the commercial item guidance for DCAA Headquarters. Lynne was assigned as a Regional Technical Specialist where she provided guidance to 20 field offices on highly complex or technical issues relative to forward pricing, financial capability or progress payment issues. As an Assistant for Quality, she was involved in reviewing and ensuring audit reports were in compliance with policy and GAGAS as well as made NASBA certified presentations to the staff including but not limited to billing reviews, CAS, unallowable cost and progress payments. To enhance her experience in government contracting, Lynne accepted a position with DCMA in 2015 as part of the newly organized DCMA Cadre of Experts in the Commercial Item Group. This included performing reviews of prime contractor’s assertions and/or commercial item determinations as well as performing price analyses. Lynne was a project lead and later became a lead analyst where she engaged with the buying commands on requests and reviewed price analysis reviews performed by a team of 5 analysts. She also assisted the DCMA CPSR team relative to commercial items and co-instructed the Commercial Item Training presented to DCMA. Education Lynne earned a Bachelor of Science Degree in Accounting from the University of Central Florida. Certifications State of Florida Certified Public Accountant State of Alabama Certified Public Accountant Defense Acquisition Workforce Improvement Act (DAWIA) Level III- Auditing DAWIA Level III – Contracting