Grant vs. Contract

The distinction between a grant and a contract in federal law determines which regulatory framework applies, what the government receives in return for its money, and which agencies have authority to make the award, a distinction with significant compliance and strategic implications for recipients.

What is the Grant vs. Contract Distinction?

The Federal Grant and Cooperative Agreement Act of 1977 establishes a clear legal test: the government must use a contract when it is acquiring goods or services for its own direct benefit, and must use a grant or cooperative agreement when it is providing financial assistance to carry out a public purpose. The test is about what the government receives in return, not about the dollar amount, the type of organization, or the nature of the work.

If the government will receive a deliverable, a software system, a constructed facility, a research report that the government owns and uses, it is a procurement and must use a contract governed by the FAR. If the government is giving money to enable a recipient to pursue a public purpose (research, education, community development), and the principal benefit flows to the public rather than directly to the government, it is financial assistance and must use a grant or cooperative agreement.

This distinction matters enormously for compliance. Contracts are governed by the FAR, which imposes detailed cost accounting, competition, and reporting requirements. Grants are governed by 2 CFR Part 200, which has its own cost principles, procurement standards, and audit requirements. An award improperly structured as a grant when it should be a contract, or vice versa, creates compliance problems and potential audit findings.

Why the Grant vs. Contract Distinction matters for government contractors

Businesses that pursue both federal contracts and grants must understand which regulatory framework applies to each award type. SBIR Phase I and II awards are grants; Phase III awards are contracts. A cooperative research project with a federal lab may be a cooperative agreement. Each carries different cost allowability rules, audit rights, intellectual property provisions, and subcontracting requirements.

Example

A software firm is approached by two federal agencies with similar-sounding projects. Agency A wants the firm to build a data analytics system that Agency A will own and operate, this is a contract, and the firm must compete for it under FAR procedures. Agency B wants to fund the firm's independent research into a novel analytics approach that could benefit the public broadly, this is a grant, and the firm applies through Grants.gov under a NOFO.

Frequently Asked Questions

Can the same organization receive both grants and contracts from the federal government?

Yes, and many do, particularly research universities and technology companies. Each award type is independently governed by its applicable regulations, and organizations must maintain separate accounting and compliance systems for grants and contracts.

What happens if the government misclassifies a procurement as a grant?

If a project that should be a contract is awarded as a grant, the agency violates the Federal Grant and Cooperative Agreement Act. The award may be subject to challenge, audit findings, or rescission. Recipients should understand the nature of their awards and flag apparent misclassifications to the awarding agency.

Are SBIR awards grants or contracts?

SBIR Phase I and Phase II awards are structured as grants or contracts depending on the agency. Some agencies (like DoD) issue SBIR Phase I and II awards as contracts; others (like NIH) issue them as grants. SBIR Phase III awards are always contracts, since Phase III involves the government procuring technology developed with SBIR funding.

Do grants and contracts have different intellectual property rules?

Yes, significantly. Under the Bayh-Dole Act, grant recipients typically retain ownership of inventions developed with federal funding, with a government license to use the invention. Federal contracts generally give the government broader data and IP rights, including limited or unlimited rights to technical data and software depending on the funding source and FAR clause structure.