Grants and Contracts – Compliance Required

While reviewing the award documents for a client SBIR recently, I noticed the following language was included:

“Failure to . . . may result in termination for default of this contract.  Contractor may be liable to refund all monies paid during the performance of this contract, receive an unfavorable past performance evaluation, an administrative assessment, or other adverse action.”

Whether this is stated in your grant or contract, the fact remains this is ALWAYS true.  Failure to comply with any aspect of the requirements for performing on a government funded project can result in having to pay back the funds.  Further, if the non-compliance is viewed as “willful and knowing” then additional financial and criminal penalties can be imposed on the company, its officers, executives, and agents.

Non-compliance with requirements includes not having robust financial and management controls systems.  The government gives flexibility in much of the “how” you run your business and document your processes and controls by saying you can use your regular business processes. If your business lacks or has inadequate controls, however, you may not continue to operate in that manner.  Lack of controls and processes is not an option.

For many early stage companies, a grant or contract award may be the driver for beginning to structure and implement business processes, structures and controls.  Also, many experienced grant and contract recipients may find that, when audited, many of their processes and controls prove inadequate.

As a government funding recipient, you are expected to manage both the federal and non-federal funds received equally well.  The guidelines provided by the government cover cost principles, allowable costs, calculations, and property control requirements, but not the specific step by step processes, procedures, or controls that need to be in place to maintain and demonstrate appropriate levels of management oversight.

The fact that the contract document you sign is only four pages long does not mean that is all there is to the agreement.  Both contracts and grants include requirements are incorporated by law, agency regulations, etc.  Many of these may be incorporated by reference, listing specific clauses and regulations, or simply through the proposal and acceptance process.

The first time you receive a grant or contract you need to begin the process of compliance.  The level and scope of compliance requirements depends upon the type and amount of funds received and the terms and conditions of the grant or contract.  As a prime contractor, you are also responsible for monitoring any subcontractors or subrecipients to ensure  they comply with requirements that pass-through to them and  they are capable – financially and managerially – of controlling funds, executing the technical aspects of the contract, and meeting other standards related to control and management of their businesses.

Here are some key areas that prime contractors and grant recipients may be required to have in place:

•    Cost control and tracking
•    Cash management
•    Management control and oversight of expenditures and activities
•    Subrecipient monitoring
•    Accounting system and controls
•    Human resource compliance
•    Intellectual property tracking
•    Fixed asset controls and tracking
•    Compensation agreements

Each business will have specific needs that are unique to their business’s configuration of operation and funding.  Requirements vary across funding agencies, funding levels, and programs.  It is important that you approach compliance as a required activity and do so strategically.  Understanding the “what, when, and how” of your business needs  is key to ensuring  the right things get done, business is accomplished in an efficient and cost effective manner, you (and the business) are able  to continue to receive funds and exist..

If you are currently receiving funds either as a contractor or a grant recipient – as the prime or a subrecipient – understanding the requirements you currently have to meet, should have met under completed but not audited programs, and will be expected to meet under awarded projects is something you need to begin today.  Just as with tax compliance, ignorance isn’t a defense.  Saying you didn’t know you had to comply or couldn’t afford to comply doesn’t get you off the hook.  If you are receiving government funds, you must comply with the level of requirements placed upon your organization by the receipt of those funds.

Here are some steps to take to begin the process:

1.    Identify all contracts and grants that have been or are currently being worked upon that have not been audited -any program/project that is three or fewer years old
2.    Read each contract to identify
a.    The type of contract – cost plus, fixed fee, time and materials, etc.
b.    The awarding agency
c.    Any clauses incorporated by reference
d.    Any clauses that are incorporated in partial text but have requirements for compliance with the full clause
e.    Any pass-through requirements to subrecipients/subcontractors
f.    Amount of contract
g.    Length of contract
3.    Create a matrix of the closed and open contracts
a.    Agency
b.    Amount
c.    Date Started
d.    Date Closed
e.    Rates used

As this matrix gets filled in, you will begin to see the cumulative levels and requirements that come into play.  Government funding isn’t looked at simply at a single award level; instead it is looked at across awards and cumulative dollars to determine how much funding you have received.  The higher the cumulative total, the more requirements the company will have to meet (in general).

Also be prepared for an audit.  Government contractors and grant recipients under new enforcement levels can generally expect to get some kind of audit/review annually.  One client recently underwent a pre-award audit.  As a new company in their first year of operation, they were being audited to determine if they could fulfill the role for the size of the business they will be when they receive the award.  If you are in the process of getting a multi-year, multi-million dollar contract, you can be required to put into place financial and management control systems, as well as subcontractor and subrecipient monitoring prior to the award.  Implement a compliance program is an investment in the future of your business.  Is it time you made that investment?

Copyright © 2004 F.O.C.U.S. Resource, Inc.

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