Grants and Contracts

When a government agency or private foundation sends money to a nonprofit, it attaches a document. The document has a title — "grant agreement," "cooperative agreement," "contract for services" — and the title matters less than most recipients assume. The legal character of the arrangement, and almost everything that follows from it, turns on what the money is actually for and what the funder actually gets in return.

The core distinction is this: a grant transfers resources to carry out a purpose the recipient has proposed, with the public or a charitable mission as the ultimate beneficiary. A contract purchases specific goods or services for the funder's direct use. That difference shapes accounting treatment, audit requirements, revenue recognition and the way restricted funds behave on the books.

What makes a grant a grant

A grant is a conditional transfer, not a purchase. The grantor says, in effect, "use this money in accordance with these terms, and we will not ask for it back unless you breach them." The organization retains programmatic discretion — it decides how to hire, whom to serve, how to sequence the work — within the boundaries the grant sets. Revenue recognition under FASB ASC 958-605 (the accounting standard that governs nonprofit financials) treats a conditional grant as a liability until the conditions are substantially met, then recognizes it as revenue. An unconditional grant is recognized immediately.

Grant funds can carry donor restrictions, which means they may sit in a restricted fund until spent on the designated purpose. A multi-year grant does not automatically make all years' money available now: if conditions attach to future tranches, each tranche is recognized in its own period. This is one reason a large grant can arrive on the books and still leave the organization short of spendable cash in year one.

Federal grants — the largest single source of grant revenue for many nonprofits — bring their own overlay. The Office of Management and Budget's Uniform Guidance ↗ (2 CFR Part 200) sets the cost principles, administrative requirements and audit threshold that govern any entity receiving federal money above $750,000 in a year. A single audit under these rules is separate from the financial-statement audit and covers compliance with each federal program's requirements. Missing the threshold does not eliminate compliance obligations; it only eliminates the formal single-audit requirement.

What makes a contract a contract

A contract is a purchase. The funder identifies what it needs — a training curriculum delivered on a specific schedule, a set number of case-management hours per month, a database built to its specifications — and the nonprofit is the vendor. The funder is the direct beneficiary. Revenue recognition is different: contract revenue follows FASB ASC 606 (the general revenue recognition standard) because the transaction is an exchange, not a contribution.

The distinction has teeth. An organization that books contract revenue as grant revenue misstates its financials. More practically, contract revenue is more likely to constitute unrelated business income if the activity falls outside the organization's exempt purpose, and it is not tax-exempt by virtue of the funder's identity. A government agency writing a check does not sanitize the income.

Contracts also carry different default remedies. A grantor clawing back misspent funds usually invokes the grant agreement's repayment clause. A government contracting officer operates under procurement law, which has its own dispute and termination procedures — including termination for convenience, which can end a contract without cause.

Why the label still matters (within limits)

Funders use "cooperative agreement" when they expect substantial federal involvement in the work — direction, approval of key decisions, co-production. That is a closer cousin to a grant than to a contract, but it triggers additional oversight. The OMB's guidance ↗ distinguishes grants from cooperative agreements specifically on this point.

The practical test any finance officer should run: who benefits directly from the activity, and does the funder retain discretion over how the work is done? If the public benefits and the organization retains program discretion, the instrument is probably a grant regardless of its title. If the funder is buying something it will use or deploy, it is probably a contract. Getting this classification right is not a formality — it determines which accounting standards apply, which audit requirements attach, and how the funds move through the books.