Government Grants or Contracts?  Be Aware of the Requirements for Running Your Business

“Winning” Isn’t Everything

Many government grant (grants, contracts, and cooperative agreements) recipients who are fortunate to receive frequent awards early in the life of their business are not fully aware of the implications and requirements associated with those awards.  It cannot be overly emphasized that GETTING the award is the tip of the iceberg.  Compliance with all aspects of contract execution is critical to the business.  Without compliance in accounting, timekeeping, recordkeeping, procurement, and many other areas of the business, the contract you receive may ultimately cost you the business.  Recipients who fail to implement and maintain sound management and financial control practices are liable for that failure – not just the legal business entity, but owners, officers, and managers, even going down to the clerical level in some instances.

Lack of Knowledge Isn’t A Defense

Being “unaware” of the requirements isn’t a defense when compliance becomes an issue.  The proposal process has embedded within it the requirement to know all aspects of compliance from federal legislation to specific contract requirements.  The business and its principals are responsible for identifying and complying with all elements, factors, and clauses.

Also, when awards are made rapidly to your company and you are a young company, you are accepting the task of implementing the requirements and investing in the business to get infrastructure – policies, procedures, processes, and systems in place NOW!  From submission to acceptance of the first contract, the business must be willing to spend the dollars to comply.

Many companies feel that in being awarded the contract the government is saying the company has met requirements.  Awarding a contract doesn’t mean an opinion has been issued on the business’ compliance.  The award is an acceptance of the representation and assertions made by the company in the bid process.  An audit is the tool used to verify that a business is in compliance with government requirements.

If you’ve never been audited – pre-award, single audit, or program audits – then no opinion has been issued on your business.  You may continue to win contracts with each contract, increasing your risk and the implications of “knowingly and willfully” (meaning you should have known the requirements and complied with them, AND you chose not to) failing to comply.

The money may be flowing in. You may be proud of the ease by which you have gotten contracts, the rapid in-flow of funds, and how fast your business is growing as a result is an achievement.  What you may not realize is the magnitude of the risk you are assuming if you haven’t been developing the appropriate accounting and management control systems to satisfy the contract requirements.

Take time to research the requirements and understand the scope of the demands on your business.  Recipients of government funds are receiving taxpayer dollars and are expected to manage those funds appropriately.  Because of the fiduciary responsibility of government agencies related to these funds, reporting and control requirements are substantial.  Determining what you need to comply with is a combination of reading your contract, researching the government agency regulations, and relating them to your business operations.

Unfortunately, many companies wait to be “caught”.  These companies believe that the requirements aren’t that important, are too expensive to implement, or simply believe they won’t be asked to comply.  WRONG!  Waiting for the audit notice to begin compliance or waiting until you have a government auditor in your offices isn’t wise.  In fact it is extremely foolish, unless of course you have money to spare to repay the contracts, pay fines, and pay a good attorney and a qualified, experienced accountant to help you clean up the mess (and potentially keep you out of jail).

Compliance is an investment in the long-term success of your business.  It isn’t a discretionary choice.  As the dollars your company receives in contracts increase, so do the requirements for compliance.  Are you ready if the auditor shows up tomorrow?  Can you demonstrate financial capability and controls? Do you have records that verify management oversight and control? Can your accounting system demonstrate the ability to track, control, and report in total and by program?  Can you show that your costing process differentiates between allowable costs and those that aren’t allowed?  What about direct costs versus indirect costs?  Can you report actual costs and expenditures against budgeted costs?  What are your policies and procedures for timekeeping, spending authorization, travel, costs, and so on?

If you have answered no to any of these questions, or you don’t understand the meaning or impact of these questions, then you aren’t prepared for the auditor.  If you receive more than $500,000 in government funds in any year (in a single program or cumulatively across programs), then you are subject to mandatory audit requirements (financial, management, and other controls and items). Companies with less than $500,000 in awards can still face financial capability and pre-award audits.

If you don’t understand what is required or how to determine those requirements, then begin by reading through the contract (grant) agreements.  Once you have read the specific contracts, visit the agency websites for information on the clauses incorporated by reference and for agency regulations and guidelines which have been published for contractors.

If you don’t understand accounting beyond the basics of dealing with the bills and payroll, then seek out financial consultants who specialize in government compliance programs.  Also, identify an accountant who understands the elements of the accounting system requirements.  You will need both a comprehensive business perspective which includes accounting, management controls, human resources, and other functions, and on-going transactional accounting and audit support from a qualified accountant.

Don’t take the risk of losing your business, having to repay the funds received, or going to jail because you don’t comply with the contract requirements.  Investing in your business’ compliance is a long term strategy to continue to grow your business and thrive.

Copyright ©2005 F.O.C.U.S. Resource, Inc.

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