As most readers of this Alert are no doubt aware, on February 17, 2009, President Obama signed into law the American Reinvestment and Recovery Act of 2009 ("Recovery Act"), Public Law 111-5. The Recovery Act represents an unprecedented outlay of government funds to support a range of projects related to, among others, renewable energy, infrastructure repair and maintenance, health care, and rural development. The opportunities are numerous for companies, state and local governments, and a variety of nonprofit entities to capitalize on stimulus funds to support research and development activities, construction projects, and the provision of goods and services to federal agencies, and state and local grant recipients.
Amid the cacophony of media reports, speeches, and punditry regarding economic stimulus legislation, two areas rich with legal pitfalls and opportunities have evaded widespread attention: (1) federal grant administration; and (2) the rules and regulations that govern third-party procurement under federal grants. Billions of dollars have been, and will be, distributed via federal grants to firms that, heretofore, may not have experience with the rules and processes that govern federal grant administration. Once companies in receipt of, or hoping to secure, stimulus funds face compliance obligations, those firms that understand their obligations will be ones that protect their assets from the threats of government enforcement actions and unfair treatment vis-à-vis their competitors.
The administration of a federal grant typically involves compliance with at least three overlapping sets of regulations: (1) government-wide grant administration rules; (2) agency-specific grant administration rules; and (3) rules imposed under the terms of a specific grant agreement.
A comprehensive analysis of the various rules that may apply to a particular grant is beyond the scope of this bulletin. Below, we illustrate some of the general rules that are likely to apply under most grants by citing to two sources: (1) an Office of Management and Budget ("OMB") circular that applies to grants awarded to institutions of higher education, hospitals or other nonprofit entities, which is codified at Title 2 of the Code of Federal Regulations ("C.F.R."); and (2) the U.S. Department of Energy's ("DOE") grant administration rules applicable to for-profit companies, which are codified at Title 10 of the C.F.R. We have selected the DOE because it is the agency administering many grant programs funded by the Recovery Act.
Financial Management and Reporting. Federal regulations require grant recipients to maintain financial management systems that meet several requirements:
- Provide for accurate, current, and complete disclosure of the financial results of each federally sponsored project
- Provide for records that adequately identify the source and application of all funds received from the government, including all fund awards, authorizations, obligations, unobligated balances, assets, outlays, income, and interest
- Establish effective control over all funds and property associated with the federally-sponsored project
- Allow for comparison of outlays with budget amounts for each award
- Include written procedures for minimizing the time between the transfer of funds to the recipient and the issuance checks or payments the recipient makes for program purposes
- Include written procedures for determining the reasonableness, allocability, and allowability of costs in accordance with federal cost principles and the terms and conditions of the grant award
- Establish procedures for the creation and maintenance of accounting records supported by source documentation
2 C.F.R. § 215.21(a); 10 C.F.R. § 600.311.
With a few exceptions, federal agencies that award grants require recipients to make regular financial reports—often by completing standard forms "SF-269" or "SF-269A," which are comprehensive reports accounting for each dollar of federal assistance a recipient has received. 2 C.F.R. § 215.52(a)(1); 10 C.F.R. § 600.341. Awarding agencies may decide whether accounting shall be on a cash or accrual basis, but recipients are not required to change from a cash system to an accrual system, or vice versa, based on an agency's decision regarding which method is appropriate under a particular program. Id. In addition to comprehensive accounting reporting, recipients must submit forms "SF-272" to account for the receipt of any cash advances each quarter. 2 C.F.R. § 215.52(a)(2).
Thus, any company hoping to benefit either as a direct recipient of a federal grant, or as a subrecipient providing goods or services to a recipient, must be prepared to establish written policies and procedures to ensure that it accounts for every dollar of federal money received, and makes timely financial reports to the awarding agency.
Audits. Institutions of higher education and other nonprofit organizations are subject to the statutory audit requirements implemented by OMB Circular A-133, "Audits of States, Local Governments, and Non-Profit Organizations." 2 C.F.R. § 215.26(a). OMB Circular A-133, in turn, requires auditors to consider all compliance requirements applicable to a grant recipient, including:
- Whether the activities being undertaken in connection with a grant are allowed or disallowed
- Compliance with applicable cost principles
- Cash management
- Federal wage and hour requirements
- Eligibility for the grant
- Equipment and real property management
- Compliance with matching or cost-sharing requirements
- Recipient's and subrecipients' suspension or debarment
- Program income
- Subrecipient monitoring
OMB Circular A-133 provides for specific audit procedures to evaluate each area of compliance. In particular, auditors seek any evidence of improper payments (i.e., the recipient's request for reimbursement of disallowed costs) or improper use of government funds that could result in a remittance to the government, as well as civil or criminal penalties in cases of malfeasance.
Commercial organizations that receive grants are subject to the audit requirements of the awarding agency. 2 C.F.R. § 215.26(d). The DOE, for example specifically requires auditors to examine grant recipients' internal controls and compliance with applicable laws and regulations. 10 C.F.R. § 600.316(b). DOE requires every grant recipient that expends $500,000 or more per year under a DOE grant to undergo an audit once per year at the recipient's expense. 10 C.F.R. § 600.316(a). Typically, a recipient will use an outside auditor, but it is within the DOE's discretion to assess and disapprove the independence of a proposed auditor. 10 C.F.R. § 600.316(d).
Thus, audits of federal grant recipients, and often subrecipients, are a matter of "when," not "if." Therefore, it is critical that firms seeking stimulus funds, whether directly or as a subrecipient serving as a vendor to a recipient, understand the audit requirements to which they will be subject, and take the cost of compliance into account when assessing the potential return on federally sponsored projects.
Cost Reimbursement. There are specific cost principle regulations that govern the costs and expenses for which a federal grant recipient may seek reimbursement under a grant. The applicable rules vary depending on the granting agency and the type of entity the recipient is. Prior to seeking reimbursement for any costs or expenses under a grant, it is critical that a grant recipient or subrecipient "build" these cost principles into its accounting system to ensure that the government or recipient is billed only for allowable items.
Rules and Procedures. When federal grant recipients acquire goods or services using funds received under grants, they must comply with specific rules that govern procurements from third-party suppliers. DOE recipients, for example, must "use best commercial practices to ensure reasonable cost for procured goods and services," and are "encouraged to buy commercial items." 10 C.F.R. § 600.331(a). In addition, grant recipients may need to obtain a DOE contracting officer's approval before publishing a solicitation for goods or services. 10 C.F.R. § 600.331(b).
The contracts between grant recipients and vendors over the "simplified acquisition threshold"1 must contain certain contractual provisions, including:
- Provisions that allow for administrative, contractual, or legal remedies in instances in which a contractor violates or breaches the contract terms, and provide for such remedial actions as may be appropriate (10 C.F.R. § 600.331(c)(1))
- Provisions that allow the recipient to terminate the contract for default (10 C.F.R. § 600.331(c)(1))
- Provisions that require third-party vendors to allow the DOE and Comptroller General access to the vendors' books and records (10 C.F.R. § 600.331(c)(3))
- Provisions that reflect federal requirements related to equal opportunity employment, the Anti-Kickback Act, and similar federal laws (10 C.F.R. § 600.331(c)(4))
Thus, any company seeking to serve as a vendor to a federal grant recipient should be aware that its customer will be required to impose specific contract terms, and follow more robust source selection procedures than are generally observed in purely commercial transactions.
Relief for Perceived Unfairness. Another unusual aspect of third-party procurement under federal grants is that there are legal procedures for potential vendors that perceive unfairness or failures to follow third-party procurement guidelines in the way a grant recipient procures goods or services.
For example, the Federal Transit Administration ("FTA") has a robust set of third-party procurement rules that recipients of federal highway funds (i.e., state and local governments) must observe.2 If a grant recipient awards a procurement contract without following procedures to ensure the reasonableness of the vendor's prices, or otherwise failing to observe procedures or requirements imposed by the FTA's third-party procurement rules, a disappointed offeror may bring its concerns to the FTA and, if the complained-of conduct by the recipient could result in waste or abuse, the FTA may, in its discretion, take appropriate action, such as filing a claim against the recipient or terminating the grant agreement for default. Thus, the threat of such reporting can give a prospective vendor leverage to ensure that the recipient does not ignore that vendor when procuring goods or services.
Similarly, vendors may file "protests" or written objections to recipients' conduct with respect to third-party procurement. Vendors "file" the protest by sending a letter to the recipient, but FTA rules require the recipient to inform the FTA anytime a protest has been asserted in connection with a procurement in excess of $100,000, and to keep the FTA informed regarding resolution of the protest. Thus, where a grant recipient fails to follow third-party procurement rules, disappointed vendors have a formal mechanism they can use to encourage agency scrutiny of the recipient's actions. There is no guarantee that the FTA will intervene or otherwise take action in response to a protest, but the protest procedure is a mechanism for inviting scrutiny.
It is critical that firms receiving Recovery Act monies, whether via grants, contracts, or other vehicles, understand the various laws and regulations with which they must comply. Firms must tailor internal policies and procedures to ensure compliance in the context of their unique structures and cultures. Noncompliance can result in penalties that erase the value of any funds received. By creating and following appropriate policies and procedures from the outset, companies can increase the chances that their federally sponsored programs are a success.