Fixed obligation grants

Most grants are cost reimbursement agreements. Like cost reimbursement contracts, the government sets the compensation based on inputs the contractor uses to make the product or service, such as time and material. In a cost reimbursement contact, the contractor will have met their obligations even if the effort produces nothing, unless it can be shown that the contractor did not exert its best efforts. The big factor driving behind cost reimbursement (vs. fixed price) contracts is risk. Sometimes it is possible to specify performance precisely. But often it is hard to know in advance whether it will be possible to achieve the performance the government wishes.

A little noticed provision of the current grants management common rule is the authority to make “fixed amount” or fixed obligation grants. The provision is rarely used, but the Federal Emergency Management Agency and the U.S. Agency for International Development have flirted with fixed obligation or performance-based grants. USAID awards fixed obligation grants to non-governmental organizations for conferences, studies, surveys, workshops, disaster or humanitarian relief and assistance, or technical development assistance. Development sectors which lend themselves to fixed obligation grants include education, health, agricultural development, and disaster assistance. The Federal Emergency Management Agency has used them for discrete, short-term projects less than $100,000. They typically use fixed obligation grants when programmatic accomplishments and results are easily quantified into benchmarks or deliverables. Before signing-off on fixed obligation grants, FEMA verifies the cost upfront, ensuring that there is sufficient cost history to negotiate realistic deliverable-based payments.

Development of grant reform

In early 2011, the president issued a directive on administrative flexibility, lower costs and better results for state, local and tribal governments. The memo directed OMB to reduce unnecessary regulatory and administrative burden and to redirect resources to services that are essential to achieving better outcomes at lower cost. The Office of Management and Budget worked with the Council of Federal Assistance Reform to minimize the time spent complying with unnecessary administrative requirements in order to re-orient grants toward achieving program objectives

The new streamlined grants management guidance issued last December clearly provide for “fixed amount awards.” Section 2 CFR 200.45 describes them as having a specific level of support without regard to actual costs incurred under the federal award. This means relying more on performance than compliance requirements, provided that accountability can be based on performance and results. By expanding options for fixed amount awards based on meeting milestones, the focus is on performance over compliance for accountability.

“Fixed amount awards” are defined a grant agreement which “provides a specific level of support without regard to the actual costs incurred.” This is very similar to a fixed price procurement contract. The guidance clearly allows fixed price or lump sum agreements – providing that accountability can be based on performance and results instead of costs. The award amount is negotiated using the cost principles or other pricing information as a guide. Federal agencies may use fixed amount awards if the project scope is specific and if adequate cost, historical, or unit pricing data is available to assure that the grantee will realize no increment above actual cost. Importantly, there is no government review of the actual costs incurred by the grantee in performance of the grant.

Due diligence

Awarding agencies have latitude is establishing their due diligence review. All will want to perform a risk assessment to ensure the grantee is responsible. They will be looking for applicants with organization integrity and capacity, such as prior federal grants or a clean audit experience. They will also want to see that applicants understand the state-of-the-art in program performance measurement, including relevant metrics and measurable milestones. They must also demonstrate budgetary acumen through effective use of the cost principles. And finally, applicants may need to have the ability to self-finance and await payment or to at least manage cash advances.

What is the upside to fixed obligation grants?

The upside is that most standard grants compliance criteria are gone. Once awarded, there is “no governmental review of the actual costs incurred.” Payments are based on:

■ meeting specific milestone, or

■ producing specific results, or

■ a unit price basis, or

■ final accomplishment.

Agencies are being asked to focus on performance. One way to do this is to expand options for fixed amount awards based on meeting performance milestones or results. The purpose of fixed obligation awards is to obtain better performance, or lower costs, or both. Every agency should be exploring this alternative.

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