TLDR
A single compliance failure — a missed report, an unallowable cost, an undocumented budget modification — can result in questioned costs, disallowed expenses, or suspension from future federal funding. These 18 questions cover the compliance decisions grants managers face every award cycle, with specific answers drawn from 2 CFR Part 200 and standard grant administration practice.
In 2023, a $3.8 million community health center received a notice that $184,000 in federal grant expenditures were being questioned following a routine monitoring visit. The cause: staff salary costs had been allocated to a federal award using the prior year’s time distribution percentages, not current timesheets. No one had updated the allocation when two employees changed assignments six months earlier. The $184,000 was ultimately disallowed and had to be repaid from unrestricted operating reserves — reserves the organization did not have. They spent the next 18 months rebuilding.
Grant compliance failures are rarely intentional. They are almost always the result of unclear ownership, missed deadlines, and undocumented decisions. These 18 questions address the specific compliance questions that arise in every award cycle.
Implementation realities and migration notes
Mid-sized nonprofits in this category typically inherit a tangle of restricted-fund histories: federal pass-throughs, state agency contracts, family-foundation grants, and partner funding stretching back many years. Migrating that history cleanly is not optional — auditors and program officers will ask questions that require a year-by-year reconstruction. Implementation timelines run six to ten weeks for organizations that scope the data inventory before signing. Cutting corners on migration to chase a fast launch usually surfaces gaps during the next single-audit cycle, and the cost of fixing those gaps after the fact is meaningfully higher than doing migration right at the start.
Plan accordingly, and require any vendor on the shortlist to demonstrate restricted-fund handling, grant tracking, and donor record migration on a representative sample of your actual historical data before you sign. Vendors that decline to demo on real data are filtering you out for a reason. The demo on your data is where the gaps surface — both the gaps in the vendor’s product and the gaps in your existing records that you will need to clean up regardless of which system you choose. Use that demo to set realistic expectations with the board and the audit committee about timeline and scope before contracts get signed.
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Frequently asked
Frequently Asked Questions
What is grant compliance and who is responsible for it?
Grant compliance is the ongoing process of managing a grant award in conformance with all terms and conditions of the award agreement, applicable federal regulations (primarily 2 CFR Part 200 for federal awards), and any funder-specific requirements. Responsibility is shared: the Executive Director is ultimately accountable as the authorized organizational representative; the Finance Manager or Controller owns financial compliance (allowable costs, financial reports, audit readiness); the Grants Manager or Program Director owns programmatic compliance (progress reports, output tracking, prior approval requests); and any subrecipients are responsible for their own compliance under pass-through requirements. In practice, the most common failure mode is split accountability with no single person monitoring the full compliance picture — deadlines are missed because each person assumed the other had it covered.
What is the difference between financial and programmatic compliance?
Financial compliance addresses how grant funds are spent: whether costs are allowable under 2 CFR 200 Subpart E, whether expenditures match the approved budget, whether financial reports are accurate and submitted on time, and whether the financial management system meets federal standards under 2 CFR 200.302. Programmatic compliance addresses whether the funded activities are being delivered as described in the award: hitting output and outcome targets, maintaining required documentation of program delivery, meeting any participant eligibility requirements, and submitting progress reports. Both types of compliance are monitored during federal grant monitoring visits and audited during single audits. A finding in either area can result in questioned costs — auditors can question costs incurred in connection with programmatic failures even if the expenditures were otherwise allowable.
How often must I submit reports for a federal grant?
Reporting frequency is specified in each award document, but federal regulations establish default expectations. Financial reports (SF-425) are typically required quarterly, semi-annually, or annually, with a final SF-425 due within 90 days of the award end date (2 CFR 200.344). Progress reports vary by program — many HHS and DOJ programs require quarterly progress reports; some allow semi-annual. The award document or Notice of Funding Opportunity (NOFO) specifies the schedule. Check your Notice of Award (NOA) — it is the controlling document. If the NOA does not specify a reporting schedule, contact your grants officer before the first reporting period ends. Waiting until a report is due to discover the schedule is a common error that leads to late submissions.
What happens if I miss a grant reporting deadline?
Missing a federal grant reporting deadline is a compliance failure under 2 CFR 200.329. The immediate consequence is typically a notice from your grants officer or grants management specialist that a report is overdue. Continued non-reporting can result in: a hold on future draw requests (the federal payment system may block draws until the report is submitted); a finding in the next monitoring review; adverse action on future award renewals; and in serious cases, referral for suspension or debarment proceedings. For most organizations, a single missed deadline with prompt correction will not escalate beyond a letter. A pattern of late reporting is treated differently. Report as soon as possible after the deadline, contact the grants officer proactively to explain the delay, and document the corrective action you are taking to prevent recurrence.
Which costs are unallowable on federal grants?
2 CFR 200 Subpart E lists specific unallowable cost categories including: entertainment and social activities (200.438); fundraising costs (200.442); goods or services for personal use of employees (200.445); bad debts (200.426); interest on borrowed capital (200.449, with narrow exceptions); lobbying (200.450); and fines and penalties (200.441). Beyond the specific list, any cost that fails the three-part test — allowable, allocable, and reasonable — is unallowable. 'Allowable' means not prohibited by statute, regulation, or award terms. 'Allocable' means the cost genuinely benefits the grant. 'Reasonable' means a prudent person would not pay more for the same goods or services. The most common unallowable costs encountered in audits are: entertainment coded as meals or team-building, fundraising staff salaries improperly allocated to program grants, and alcohol purchased at conferences.
How do I handle a budget modification mid-award?
First, determine whether the modification requires prior approval. Under 2 CFR 200.308, prior approval from the federal awarding agency (or pass-through entity) is required for: transfers between direct cost categories that exceed 10% of the total award budget, adding a new budget category not in the approved budget, changes in scope or objectives, and adding or changing a subcontractor. Many awarding agencies have more restrictive thresholds. If prior approval is required, submit a written request to your grants officer before incurring the costs — retrospective approvals are rarely granted and expenditures incurred without prior approval may be disallowed. If prior approval is not required (the modification is within the 10% threshold and does not change scope), document the reallocation in writing anyway, update your budget tracking system, and notify your grants officer as a courtesy. Surprises in the final financial report create more friction than proactive communication mid-award.
What is indirect cost and how is it calculated?
Indirect costs are expenses that benefit multiple programs and cannot be directly traced to a single grant — occupancy, utilities, executive salaries, general IT infrastructure, accounting. They are calculated by applying an indirect cost rate to a direct cost base. The rate expresses indirect costs as a percentage of direct costs. For example: if your indirect costs are $200,000 and your total direct costs are $800,000, your indirect cost rate is 25%. You apply that rate to each grant's direct costs to determine the indirect cost charge. The direct cost base is typically Modified Total Direct Costs (MTDC), which excludes equipment, capital expenditures, subcontract costs above $25,000, and a few other categories from the base. For federal awards, your rate must be either negotiated with your cognizant federal agency (a NICRA) or you may use the 10% de minimis rate if you have never negotiated a rate before (2 CFR 200.414(f)).
What is the de minimis indirect cost rate?
The de minimis indirect cost rate is a 10% rate applied to Modified Total Direct Costs (MTDC), available to any non-federal entity that has never negotiated an indirect cost rate with a federal agency (2 CFR 200.414(f)). It is the simplest option for organizations that lack the capacity to negotiate a rate or whose actual indirect cost rate is below 10%. You do not need to submit a cost allocation plan or negotiate anything — you simply apply 10% to MTDC on each federal award budget. Two limitations: (1) it cannot be used if you are required to negotiate a rate with your cognizant agency; (2) if your actual indirect costs exceed 10% of MTDC, you are absorbing the difference — you are not recovering your full overhead. For organizations with tight margins, the de minimis rate should be compared against a cost allocation study to determine whether negotiating a higher rate would meaningfully improve cost recovery.
What records must I keep and for how long?
Under 2 CFR 200.334, federal award records must be retained for three years from the date of submission of the final expenditure report. Key exceptions that extend this period: if the award is under audit or litigation, records must be kept until the matter is resolved; equipment records must be kept for three years after disposition; records for real property must be kept for three years after disposition; and any records that support a cost sharing contribution must be retained for three years from submission of the final report. For the base three-year rule: if your award ends September 30, 2024, and your final expenditure report is submitted December 29, 2024, your retention period runs until December 29, 2027. Retain: all financial records, supporting documentation for every expenditure, time and effort records, procurement files, subrecipient monitoring records, reports, and correspondence with the awarding agency.
What is a subrecipient and what monitoring is required?
A subrecipient is an entity that receives a sub-award from a pass-through entity to carry out part of a federal program. If your organization receives a federal grant and then provides funds to another nonprofit to deliver part of the program, that nonprofit is your subrecipient. Under 2 CFR 200.332, you (the pass-through entity) must: evaluate each subrecipient's risk before award; include all required federal flow-down provisions in the sub-award agreement; monitor subrecipient performance and financial management throughout the award; review financial and programmatic reports; and conduct on-site visits for high-risk subrecipients. At a minimum, monitoring means reviewing subrecipient financial reports, confirming expenditures are allowable, and verifying the subrecipient is not debarred. You cannot delegate your monitoring obligation — if your subrecipient misuses federal funds, you are liable for those costs even if you 'didn't know.'
What is a no-cost extension and when can I request one?
A no-cost extension (NCE) extends the period of performance for a federal award without providing additional funds. You request one when you have unspent funds and need additional time to complete the program activities — not to cover cost overruns. Under 2 CFR 200.308(e)(2), most non-construction awards are entitled to a single automatic no-cost extension of up to 12 months, which the organization can invoke without prior agency approval by notifying the awarding agency in writing before the award end date. Additional NCEs beyond the automatic one require prior approval. Request an NCE as soon as you determine you cannot complete the program by the award end date — requests submitted in the final week or after the award ends are often denied. Document why additional time is needed and confirm you have sufficient unspent funds to justify the extension.
What is a questioned cost and what happens if I have one?
A questioned cost is an expenditure that an auditor has identified as potentially unallowable, unsupported, or inappropriate for a federal award. Costs are questioned because they are: (1) not permitted under the award terms or 2 CFR 200; (2) not supported by adequate documentation; or (3) not allocable to the award in question. A questioned cost in an audit is not automatically a disallowed cost — the federal awarding agency (or pass-through entity) makes the final determination. If you disagree with a questioned cost, you have the right to respond with additional documentation or arguments. The federal agency issues a management decision within six months of audit report issuance (2 CFR 200.521). If costs are ultimately disallowed, you must repay them. The most common resolution: questioned costs are resolved by providing documentation that was missing from the auditor's review — proper invoices, time records, or procurement files that were never requested during fieldwork.
What is the difference between a finding and a disallowed cost?
A finding is a conclusion by an auditor that a material weakness, significant deficiency, or noncompliance exists in a program or system. It is a statement of condition — 'the organization did not maintain adequate documentation for personnel charges to federal awards.' A disallowed cost is a specific dollar amount that a federal awarding agency has determined is not chargeable to the award, following audit resolution. Not every finding results in disallowed costs: a finding about internal control weakness may result in a corrective action requirement but no disallowance. A finding about unallowable expenditures typically does result in a disallowance of the specific amounts involved. The finding is the audit's identification of the problem; the disallowance is the funder's financial consequence for that problem.
How do I handle program income?
Program income is gross income earned by the recipient that is directly generated by a supported activity or earned as a result of the federal award during the award period (2 CFR 200.80). Examples: registration fees for grant-funded training, proceeds from services delivered under a grant. Under 2 CFR 200.307, program income must ordinarily be used to further the objectives of the award — it is added to the award, deducted from allowable costs, or used on a cost-sharing basis, as specified in the award terms. The award document or program regulations specify which treatment applies. Program income that is not tracked and reported correctly is a compliance finding. If your federal program generates any fees, rental income, or service revenue connected to grant-funded activities, check your award document immediately for how that income must be treated.
What is a grant closeout?
Grant closeout is the formal process of completing all administrative and financial actions for an award after the period of performance ends. Under 2 CFR 200.344, recipients must submit all final reports (financial, programmatic, and any required inventories) within 90 days of the award end date. Actions required at closeout: submit final SF-425 and all programmatic reports; liquidate all obligations — pay all invoices for goods and services received during the award period; return any unobligated (unexpended) federal funds; dispose of equipment as required by 2 CFR 200.313; and prepare and retain all records for the required retention period. The awarding agency must complete its administrative actions within 360 days of receiving all required closeout documents. Closeout is not complete until you receive written confirmation from the awarding agency — keep all records until you have that confirmation and through the retention period.
What triggers a federal single audit?
A federal single audit is required when a non-federal entity expends $1,000,000 or more in federal awards during its fiscal year (2 CFR 200.501, updated threshold effective for fiscal years ending September 30, 2025 or later; the prior threshold was $750,000). Federal awards expended include direct federal grants, federal contracts, federal loans, and sub-awards from pass-through entities that flow down federal funds. All federal sources are aggregated — ten $200,000 grants from ten different federal agencies add up to $2,000,000 and trigger the single audit requirement, even though no single award exceeds the threshold. The single audit is an independent audit of the financial statements plus a compliance audit of federal programs, conducted under Government Auditing Standards and the requirements of 2 CFR 200 Subpart F.
How do I respond to an audit finding?
Your response to an audit finding has three required components per 2 CFR 200.511: (1) your position on whether you agree or disagree with the finding and the reasons why; (2) a description of any corrective action taken or planned, with responsible parties named and completion dates specified; and (3) if you disagree, specific documentation or arguments supporting your position. Write the management response carefully — it becomes part of the audit report and is available publicly via the Federal Audit Clearinghouse. Do not be defensive; be specific and action-oriented. A good response demonstrates that you understand what went wrong, have already addressed the immediate problem, and have put controls in place to prevent recurrence. After the audit is issued, monitor your corrective action plan and be prepared to demonstrate completion during the next monitoring visit.
How does 2 CFR 200 apply to our grants?
2 CFR Part 200 (Uniform Guidance) applies to all non-federal entities receiving federal awards, including grants, cooperative agreements, and cost-reimbursement contracts. It applies regardless of the federal agency making the award and regardless of whether the award is direct federal or a pass-through from a state or local government. The full regulation — cost principles, administrative requirements, and audit requirements — applies to every active federal award in your portfolio. If you receive only private foundation grants, 2 CFR 200 does not apply, but your grant agreements may incorporate similar requirements by reference. Practically: if any of your funding flows from any federal agency at any point in the chain, treat 2 CFR 200 as your baseline compliance standard for that award.