Grant compliance for nonprofits: basics and best practices

In 2023, the Department of Health & Human Services (HHS) awarded grants and funding totaling $1.78 trillion across nearly 144,000 disbursements. Nonprofits and awardees know funding opportunities like these equip their organizations to achieve more significant impacts, but they also know grants require much more than submitting applications and collecting checks.

Grants generally fund specific projects with defined pursuits, requiring recipients to adhere to specific terms and report on progress and outcomes.

Moreover, grant funding requirements enable nonprofits to demonstrate transparency and accountability. This becomes crucial for ensuring the proper use of public resources as federal agencies conduct site visits and reviews to ensure compliance.

Grant compliance is never easy. Tracking spending, deadlines, and all the individual grant compliance regulations specific to a given award introduce many challenges. However, most of these can be minimized with grant administration best practices, improving internal processes, and data collection—issues addressed with the right grant management software.

What is grant compliance?

Grant compliance is the process of ensuring proper use and reporting of awarded grants. Many nonprofit organizations rely on state and federal grants, with several requirements for disbursement, service period, procurement, and reporting. Private awards likely involve requirements and conditions, too.

For example, you may need to submit grant-related expenditures, community engagement efforts, and progress toward your stated goal or outcomes each month.

Your ability to follow requirements impacts your future chances of obtaining funding. Regulations and policies differ across organizations, oversight boards, and federal agencies, so it’s vital to understand and adhere to the standards of your specific funding agency or private foundation.

Why is grant compliance important?

Nonprofits rely on grant compliance efforts and documentation to maintain an outstanding reputation and ensure good standing with grantors. This documentation demonstrates that the awarded funds went toward their intended purpose without misuse or inaccurate or inconsistent reporting.

Compliance also proves that a nonprofit operates with a reliable grant management team. All departments, including program personnel, legal, accounting, and procurement, are responsible for compliance.

Consequently, compliance paves the way for long-term support and funding for your projects. Otherwise, failure to comply can lead to loss of current or future funding, legal implications, and reputational risks, affecting your organization’s ability to realize its mission.

Key components of grant compliance

Post-award compliance saddles nonprofits with time-consuming administration and paperwork, but it’s critical. Regardless of the agency or program, you must understand the vital components of compliance to ensure grant accountability, transparency, and mission success.

Understanding grant terms and conditions

Grants come with a binding legal agreement that outlines the fund’s terms and conditions. They cover different areas, including:

• Taxes
• Use of funds
• Disbursement amounts and schedules
• Prohibited activities
• Making project changes
• Agreement breaches and ramifications
• Codes of conduct

The terms and conditions might also be specific to the recipient and project. For instance, if your organization experienced a past compliance issue, the grantor might customize your terms and conditions.

It’s best practice to review the award notice of any grant to negotiate the terms and conditions, if needed, and understand the compliance requirements. Your nonprofit can sign the award notice only after accepting the terms and conditions.

Financial management and reporting

You must develop a comprehensive financing policy detailing how your organization will manage, track, and report the funds. The grant policy must be specific to the funds, considering the unique guidelines and requirements of the grant.

Align your entire team to ensure everyone understands what the funds can and can’t be used for. Review the reporting requirements and deadlines; some grants may require interim and final reports.

Evaluating program performance

A grant evaluation plan establishes the roadmap crucial for reviewing the performance and success of your grant-funded projects or programs. The plan outlines the program’s goals, objectives, and the steps for tracking results. 

Most grantors require nonprofits to have a performance evaluation plan. The plan can be formative or summative.

• Formative evaluations occur during the project to gauge how well it’s implemented.
• Summative evaluations occur at the project's end to determine whether you achieved the set goals.

Regardless of the evaluation method, make sure to document all achievements and outcomes. For example, if running a school-based program to improve student literacy in underserved populations, one achievement could involve student participation rates, with overall outcomes demonstrated through year-over-year testing scores or other metrics. Sharing this data with your grantor will validate your program’s impact and boost overall funding access.

Best practices for grant compliance

Your program’s continuance hinges on your performance and grant administration, with well-defined and documented compliance efforts ensuring the accurate and responsible use of funds. Adopting the following grant management best practices helps your nonprofit remain compliant and continue sourcing mission-critical funds.

Thoroughly understand requirements

Whether you receive a federal or foundation grant, take the time to understand every facet of the requirements. Review the agreement document to understand all the grant funding rules and guidelines before signing anything. Expect more stringent rules than other types, particularly for tax-funded government grant compliance.

An important resource to review is § 2 CFR 200, which outlines the expectations around agreements and grants, covering:

• Reporting
• Core principles
• Administrative requirements
• Audit requirements

Federal and state grants will require more reporting to evaluate and validate your program’s impact.

Establish internal controls

Crucial for tracking grant funds and reporting—you must establish procedures, policies, checks, and balances that prevent costly mistakes, fraud, and other errors. You may even create a grant compliance officer role or grant compliance checklists to oversee them.

Ensure your internal controls comply with the “Standards for Internal Control in the Federal Government.” It should have policies covering:

• Travel
• Cash management
• Conflicts of interest
• Budget reconciliation
• Procurement
• Time reporting

This way, you can have defined approval processes, particularly for tasks that require multiple approvals to reduce fraud or the risk of errors. Review and update your internal controls regularly to adapt to program changes.

Create a standard tracking process

Develop a standard process or system for tracking and managing your grants to ensure efficiency and accountability. If managing several grants, each must have a unique operating procedure based on the grantor's requirements and standards.

A standard process must consider critical tasks, requirements, deadlines, reviews, and approvals. As you establish the process, consider your team's preferred working styles and pay attention to financial, programmatic, and operational impacts.

Of course, grant management software makes all this tracking much easier with a centralized platform for creating standard processes and grant tracking. These solutions can also track tasks, expenses, reporting requirements, and calendar deadlines to streamline end-to-end grant management.

Prepare for audits

Keep all your financial statements well-organized and accessible to simplify audits. Establishing a central repository or digital storage for grant documentation makes retrieval easier. When you receive grant audit requests, read them carefully before responding to ensure you provide the correct information.

In most cases, auditors examine your financial records, transactions, and activities related to the grant to assess compliance with the grant’s agreement, guidelines, and regulations. They also evaluate your internal controls to check your ability to prevent waste, fraud, and abuse of funds.

Provide training and education

Train and educate your team on grant management and compliance to ensure all members are involved. Compliance remains the shared responsibility of every team member, and their actions can break or make your program.

Your training or education programs should cover the following:

• Compliance requirements
• Financial management
• Grant reporting requirements
• Regulatory updates

Take advantage of industry webinars, workshops, and conferences to keep your team updated on everything related to grant compliance challenges and nonprofit management. For instance, ensure a team member stays abreast of regulatory changes to inform and guide the rest of the team.

Leverage software

Grant management involves different processes, tasks, and teams, resulting in a complex operation. Manual and traditional systems can be ineffective, error-prone, and especially slow in managing grants, potentially resulting in compliance issues.

This often occurs because most platforms aren’t developed for philanthropic operations but merely converted for them with bolted-on or adjusted functionality.

Instead, consider leveraging dedicated grant management software for nonprofits to adhere to standards and requirements. For instance, a software solution like Foundant GrantHub features built-in tools and audit trails to help your team monitor grant compliance.

Software solutions also support budgeting and financial management to ensure transparency and accountability. More importantly, they simplify post-award grant management—from fund distribution to final reporting—to keep your team in control and ensure compliance.

Learn more about our grant management software for nonprofits

With limited funds available, federal agencies and foundations closely monitor how grantees use what’s awarded. This is particularly important for state and federal grant compliance, which rely on taxpayer dollars to fund grants and have taken oaths to ensure the efficient use of public resources.

Consequently, grant compliance involves strict requirements and standards for recipients to ensure funds are used as intended.

Grant management software can simplify compliance by streamlining tracking and reporting processes, and Foundant offers these capabilities and more. Our software allows you to generate reports, collaborate with team members, conduct pre-award research, and automate notifications.

You can access intuitive dashboards for high-level overviews and actionable reports to share performance with funders. With these powerful features, you can efficiently manage your grants from fund distribution to reporting to ensure optimal compliance for nonprofits.

Learn more about our grant management software for nonprofits and how it can simplify your nonprofit grant compliance.