The Importance of Understanding Grant Policies

For many nonprofit organizations, grant funding is the lifeblood that sustains their missions and programs. However, failing to thoroughly understand the policies and requirements attached to these grants can have severe consequences.

From compliance issues to funding clawbacks, the risks of misinterpreting grant terms are substantial and can jeopardize a nonprofit’s ability to carry out its mission.

For example, imagine you lead a small youth services nonprofit that has just received a multi-year federal grant to support its after-school programs. Excited by the new funding, your team quickly launches expanded programming and hires additional staff.

Then, two years into the grant period, an audit reveals significant unallowable expenditures and inadequate record-keeping. As a result, your organization is forced to repay a large portion of the funds — derailing your programs and throwing your organization into a financial crisis.

An in-depth understanding of grant policies could have avoided this crisis from the beginning.

Common Misunderstandings Regarding Grant Policies

Even the most well-intentioned and experienced nonprofits can fall victim to misunderstandings when it comes to administering funding in compliance grant policies.

Let’s explore some of the most frequent areas where confusion arises.

Grant Policies for New Grants

For many nonprofits, grant funding is their largest revenue source, exceeding fundraising proceeds. The more diverse funding streams an organization can secure, the better positioned it will be to fulfill its mission.

However, this reliance on grants — especially if your organization relies on only a few large awards — means compromising even one can significantly threaten operations.

Because grant terms can be time consuming and difficult to read (especially for those who lack expertise in this area), organizations often misunderstand their requirements. Recipients may fail to read the agreement in its entirety or simply don’t know key terms due to a lack of experience reading these types of documents.

In either case, this can lead to problems later, especially once grant spending surpasses the single audit threshold. Organizations can prevent this issue by relying on an expert advisor (like those at James Moore) to break down all grant requirements before signing an agreement.

Recipient Types

Grant funding can flow to an organization through different arrangements, each with its own set of requirements. The type of recipient directly impacts allowable costs, reporting obligations and other grant management responsibilities. However, nonprofits often lack clarity around which category they fall under for a given grant. And sometimes this leads to unintentional noncompliance.

Recipient types include:

• Prime Recipient: The organization that directly receives and administers the grant funding from the awarding agency. Prime recipients are responsible for overall grant compliance, performance reporting, and monitoring of any subrecipients.
• Subrecipient: An organization that receives a portion of the grant funding from the prime recipient to carry out part of the grant program. Subrecipients must comply with many of the same grant requirements as prime recipients.
• Contractor: An organization hired by the prime recipient or subrecipient to provide specific goods or services in support of the grant program. Contractors are subject to fewer grant compliance requirements than recipients or subrecipients.

To illustrate, consider a nonprofit that receives a grant as a subrecipient to provide job training services under a workforce development grant. If they mistakenly treat themselves as a contractor, they may fail to properly segregate allowable costs and submit incorrect financial reports. This puts them at risk of having to return funds due to noncompliance.

Clearly defining your recipient status is crucial for understanding your obligations from the outset. When reviewing grant agreements, be sure to identify your organization’s role and the corresponding requirements.

Internal Controls and Record-Keeping

Grants universally mandate that recipients implement specific internal controls and keep records of all grant expenditures. Not following these record-keeping and monitoring requirements can result in audit findings and noncompliance.

For nonprofits under the expenditure threshold for a single audit ($1,000,000 in federal funds or $750,000 in state funds), these deficiencies may go undetected for some time. However, as grant funding increases and spending rises to cross that single audit threshold, the lack of proper controls will likely trigger findings.

While reporting obligations vary across grants, internal control requirements tend to be more consistent — meaning proactive, robust processes can typically govern all grants, regardless of single audit applicability.

Challenges for Smaller Nonprofits

For smaller nonprofit organizations, the risk of misunderstanding grant policies is amplified by very real constraints:

• Limited staff and resources: With lean teams, organizations may lack personnel dedicated to grant administration and compliance monitoring.
• Lack of dedicated grant expertise: Without in-house grant experts, others throughout the organization may be forced to take on grant management responsibilities without vital specialized knowledge.
• Overburdened leadership: Executive directors and other leaders juggle a wide range of strategic and operational duties, leaving little bandwidth for mastering grant nuances.

These capacity limitations increase the likelihood of oversights or misinterpretations regarding grant terms. However, they don’t diminish the obligations to funding sources. This underscores the importance of prioritizing a full understanding of grant policies, especially for leaner organizations.

Best Practices for Administering Grant Funding

To avoid the pitfalls of misunderstanding grant policies, all nonprofits should adopt the following best practices.

Proactively Analyze Grant Obligations

Ensure an in-depth understanding of grant obligations up front before agreeing to the grant. Thoroughly review grant agreements, guidelines, terms and conditions with key personnel. If necessary, involve external consultants or advisors to analyze requirements, define ambiguous terms and clarify obligations before signing.

Establish Robust Internal Controls

Because many internal control expectations are consistent across grants, implementing rigorous processes from the start can facilitate compliance as funding grows. Common internal controls requirements include segregating duties, maintaining documentation, monitoring budgets and more.

Accurately Assess Your Organization’s Capacity

Evaluate whether your organization has the resources and expertise to satisfy all requirements of a prospective grant. In some cases, turning down funding that exceeds your capabilities may be the prudent choice to avoid risking compliance issues.

How James Moore Can Help Maximize the Impact of Grant Funding

For nonprofits looking to optimize their grant funding opportunities while mitigating risks, the advisors at James Moore offer comprehensive services.

Before a grant is agreed upon, James Moore’s expert nonprofit advisors can conduct a thorough assessment of the grant requirements and help you determine if the grant is a good fit for your organization’s resources and goals. This proactive approach ensures you understand the obligations up front. This allows you to properly prepare, which helps you unpleasant surprises due to oversight.

Once grants are active, James Moore can conduct required single audits to evaluate financial statements and test compliance with all grant requirements. Leveraging this type of external expertise allows you to pursue grant opportunities confidently while dedicating your limited resources to fulfilling your mission.

Stay Ahead of Grant Requirements with James Moore

In the nonprofit sector, grant funding is indispensable. It sustains the incredible work being done every day in communities across the country. However, to continue receiving that funding, organizations must comply with strict requirements.

By prioritizing an in-depth understanding of grant policies from the beginning, you can administer funding more effectively while mitigating risks of noncompliance. If your team lacks the necessary expertise to analyze grant requirements, James Moore stands ready to provide clarity and guidance.

Proactively mastering grant requirements allows you to maximize the impact of every funding dollar. Contact us to learn how our nonprofit advisors can help.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.