Government Grant and Contract Recipients – “Invest” in Your Business
Most of us have our own definition of “investing.” As it is being used in this article, however, “investing,” refers to committing funds to ensuring your company has a healthy infrastructure which meets the requirements imposed by the government via grant and contract relationships. Many businesses do not take the time required to understand fully the scope of requirements they are expected to meet in return for these funds.
It is expected a business will comply with all relevant regulations – federal, state, agency, and grant or contract specific –are applicable to the transaction from the first grant or contract. Companies are recipients of funds the government has a fiduciary responsibility to ensure are handled properly. Mismanagement of the funds may lead to significant civil and criminal penalties against the business, its owners, officers, managers, and employees. There are many instances each year where companies are caught violating laws or failing to comply with requirements.
Many companies make the mistake of believing that the direct costs charged to the project are the main concern. The direct charges to a grant or contract are certainly the most visible. They are also the most straightforward.
The largest pitfalls can be found in the area of indirect costs, those that are shared across all activities and are “general business” costs. Indirect costs of the business are allocated across projects (grants and contracts included). What is important to understand is that not all costs are allowed to be charged to government projects. Expenses such as public relations, entertainment (including alcoholic beverages), patent defense, and many others are not allowable costs under government regulations. This necessitates the business being able to separate costs into allowable and disallowed costs before allocations are made.
Indirect costs are a significant point of contention in every program because the government (Congress) believes indirect costs should not be covered. Many programs actually exclude or limit the total amount of indirect costs which can be charged. The result for businesses is that there is significant scrutiny of ALL costs and a high expectation of robustness of financial and managerial control processes and systems used by grant and contract recipients.
If you are an early stage company, have received grants or contracts, and you are the prime (direct recipient from the government), then you have an even higher performance expectation to meet. An additional layer of requirements is added if, as prime, you will have subs (subrecipients or subcontractors). As the prime contractor, you are responsible for following the appropriate procurement procedures and for monitoring the activities, funding, and performance of any sub.
Government funding (grant or contract) is not to be taken lightly when it comes to internal processes and controls. Your organization is accepting substantial responsibility which requires changes in your business to ensure compliance. These changes are an investment in the ability of the organization to continue to receive government funds AND can provide substantial operational benefits through improved managerial controls and reporting processes.
When you make the wise choice to invest in compliance, be sure that the investment is managed properly. It is important to take the following steps:
1. Identify the full scope of requirements
a. Imposed by programs
ii. Cumulative (across all projects)
b. Imposed on functional areas and activities
i. Finance and accounting
iii. Management control
vi. Project management
viii. Human Resources
ix. Information Technology
xi. Intellectual Property
2. Identify gaps between existing infrastructure and requirements
3. Establish project parameters
4. Get assistance with any items for which your organization doesn’t have the expertise (same items as in 1.b.)
5. Build the capability for doing business under government rules and regulations
a. Working with experts
b. Training and certification classes
c. Maintaining reference materials
d. Hiring skilled “technicians” for grant and contract management (experienced or trainable)
The bottom line is that when you accept government funds and sign the agreements you are accountable for all of the requirements – program (technical), financial, and administrative – from day one of the first agreement. Getting it right isn’t optional. Getting it wrong is costly for everyone.
Copyright ©2005 F.O.C.U.S. Resource, Inc.