Beware of Easy Money

Every organization is in search of new revenues to support its mission. It might be tempting to see federal and state grants as a cost-free source of those revenues. Before you go chasing those new grants, you should be aware that they can come with a heavy administrative burden. Here are a few of those burdens to keep in mind:

• Written policies and procedures. I know what you are thinking, “I already have those so it’s not a big deal”. But realistically, how long has it been since you’ve updated them? The expectation is that those are updated each year and affirmed by your board.
• Payroll record keeping. Documentation must be maintained for each employee whose salary is funded by a grant. This can be especially cumbersome if that employee is working on multiple programs, some of which are grant funded and others of which are not. If you have an automated payroll system and allocate that employee’s payroll costs based on an estimate of the time incurred, that is sufficient provided you update the estimate at least quarterly. If you don’t have such a payroll system, you will need to maintain manual records evidencing the level of effort expended by the employee on the grant program.
• Procurement record keeping. If you want to pay for allowable goods or services using grant funds, you must ensure that you are getting the best rate for those goods or services. You have to maintain a written procurement policy to which you adhere. This can mean getting a few verbal quotes for smaller purchases (say less than $25,000), or it can mean doing a full blown competitive solicitation for proposals for larger purchases and adhere to them for both federally funded and non-federally funded purchases. You must establish those purchase thresholds as part of your procurement procedures. Micro-purchases, defined as those below $3,000, are exempt from this requirement.
• Grantor oversight. You may have to provide a significant amount of detail to the grantor, both financial and non-financial, just to begin drawing down the grant funds as you incur allowable costs. Then, you have to report periodically to the grantor on the status of the grants. Most grants require some form of quarterly reporting; some may require it monthly. At a minimum, you will need to report to the grantor annually, and you need to ensure that those reports reconcile to your books and records. I am also seeing significantly greater oversight being exercised by grantors. Responding to this additional oversight can take valuable time away from your employees. And if you happen to pass some of the money through to another recipient, becoming a grantor yourself, all of these oversight burdens you bear as a grantee you must actually execute as a grantor.
• Audit requirement. Recipients of federal grants that expend more than $750,000 in federal awards are required to get an audit in that year. If you fall below that threshold, you are not required to get an audit as a condition of expending federal grant monies.
• Clawback. Perhaps the biggest risk is that, if you don’t spend the monies appropriately or fail to follow the grant regulations, you may need to repay them to the grantor. So, it is critical to have adequate monitoring controls in place to ensure that you are managing this clawback risk.

So, given these additional burdens discussed above, a question you may be asking is “how much does that realistically cost me”? While there is no widely available data indicating that cost, the federal government does allow, as part of its Uniform Grant Guidance, that a 10 percent administrative indirect cost rate can be charged to the federal government. While this is really meant to defray the indirect costs of administering the grant, I have always thought of this as a way of funding the administrative burden that the grantor imposes. That rate represents a floor, not a ceiling, though, in terms of administrative burden. My experience is that the compliance costs can generally run up to 25 percent of the grant funding received.

In closing, be wary of the allure of this “easy money”. It can come with many strings attached, imposing extra burdens that must be managed, and, if not managed well, can lead to a risk of having to repay that money. However, if well monitored and managed, grant monies can be a great new source of funding supporting your mission.