Can They Cut Off Your Federal Grant at the Next ‘Cliff’?

Federal Reserve Board Chairman Ben Bernanke is probably one of millions of Americans who wishes that he had never tried to warn the federal government about the potential economic impact of automatic tax increases and spending cuts that were scheduled to take effect on Jan. 1 by using the term “fiscal cliff.” Few phrases have gone as viral or become as tiresome as that one.

Of course, the anticipated catastrophe was avoided — at least for a couple of months. But the spending-cuts’ part of the federal budget battle is still very much in play and slated to be revisited in early March. And the mainstream media is already hyping the likely political confrontation involving the president and Congress and the potential impact on federal agency operations and award actions.

Continuing speculation about the impact on organizations that do business with the government has led more than a few federal grantees to wonder whether their existing grants might be subject to being terminated as part of any future spending cut deals. Part of the reason for the questioning also has to do with the fact that the differences between federal contracts and federal grants, and their underlying termination provisions, are often obscured in the media coverage.

Federal regulations covering the administration of contracts (48 CFR 49) provide that, as the parties buying goods or services for principal benefit of the government, federal agencies have the right of termination for default (failure to perform contractual obligations) and termination for convenience of the government. In both cases, there are specific detailed steps that federal contracting officers are expected to take in settling the terminated contract.

In the case of termination for convenience, however, the basis for the decision is not required to be communicated to the contractor. The applicable contract clauses that permit that action simply state that it may be done “ïf the Contracting Officer determines that a termination is in the Government’s interest.” Accordingly, if it is in the government’s interest to reduce its costs and cease activities that are of lower priority, individual contracts could be affected.

On the other hand, the federal regulations that cover administration of grants and cooperative agreements are derived from two Office of Management and Budget Circulars — A-102 covering state, local and tribal governments and A-110 covering colleges and universities, hospitals and other nonprofit organizations. Both circulars indicate that, unless a federal statute provides otherwise, their provisions apply to all grants and cooperative agreements awarded by all federal agencies.

On the subject of termination, they make clear that once funds are actually obligated to a direct grant or cooperative agreement, the award may only be terminated in one of the following ways:

• By the federal awarding agency if the recipient materially fails to comply with the terms and conditions of the award;
• By the federal awarding agency with the consent of the recipient; or
• By the recipient upon sending to the federal awarding agency written notification setting forth the reasons and the effective date.

Based on that language, termination of grants and cooperative agreements for convenience of the government is generally not available and an obligated federal award would not be subject to reduction or termination. However, grantees should remember that, where an award is incrementally funded, as many multi-year discretionary projects are, only the amount that has actually been obligated would be considered safe from federal budget cutting.