Why Grant Compliance and Funding Identification Remain Major Challenges for Higher Education Institutions

Colleges and universities depend on federal and state funding to support student financial aid, academic programs, research, workforce development, public service, facilities, and institutional initiatives. These resources expand access and help institutions pursue projects that may not be possible with tuition and other operating revenue alone. Yet the most difficult part of an award is often not obtaining the funding. It is correctly identifying the source, understanding the applicable requirements, and upholding compliance throughout the award's life cycle.

The compliance process begins before the first expenditure and continues through closeout. An institution must determine what rules apply, establish appropriate accounting and oversight, communicate requirements to the people administering the award, and retain evidence that funds were used appropriately. Weaknesses in any of these areas can cause delayed reimbursement, questioned costs, repayment obligations, audit findings, or harm to reputation.

Start With the True Source of Funding

One of the first challenges is determining whether an award is federal, state, or state-administered federal funding. An institution may receive money from a state agency, another university, or a nonprofit organization and assume it is nonfederal. In many cases, however, that organization is passing through a federal award. The institution may therefore be a subrecipient subject to federal program requirements, the Uniform Guidance, and reporting on the Schedule of Expenditures of Federal Awards (SEFA).

You cannot determine the distinction solely from the entity that sends the payment. Institutions should review the notice of award, grant agreement, contract, reimbursement documents, and related correspondence. Indicators of federal funding include a federal agency or program name, an Assistance Listing Number (ALN), a Federal Award Identification Number, a pass-through entity and identifying number, references to 2 CFR Part 200, or terms that explicitly impose federal requirements.

Institutions should also distinguish money awarded from an exchange transaction, state appropriation, or other funding arrangements. The accounting and compliance consequences can differ significantly. When the documentation is unclear, the institution should obtain written clarification from the awarding or pass-through entity before spending begins.

Higher Education Awards Carry Diverse Compliance Requirements

Higher education institutions often administer many awards at the same time, and the requirements are not uniform. Student financial assistance programs may involve eligibility, enrollment status, disbursement, return-of-funds, and reporting requirements. Research awards may impose restrictions on project scope, participant costs, equipment, subawards, cost sharing, publication, or data management. State-funded programs may have separate eligibility rules, performance measures, matching provisions, reimbursement procedures, and closeout deadlines.

A cost that is reasonable and beneficial to the institution is not automatically allowed under an award. Costs generally must be permitted by the award, incurred within the authorized period, adequately documented, treated consistently, and properly allocated to the benefiting activities. Pre-award spending, administrative salaries, travel, equipment, participant support, scholarships, and indirect costs may require special attention or prior approval.

Accounting and Cost Allocation Must Support Each Award

The accounting system should separately identify each award, funding source, project period, responsible department, and relevant cost category. Without award-level tracking, expenditures can become mixed with unrestricted activity or with other sponsored projects. This makes reimbursement requests, financial reports, closeout, and SEFA preparation more difficult and increases the risk of charging the same cost to more than one funding source.

Payroll and personnel costs are especially important because faculty and staff may work across instruction, research, public service, administration, and multiple sponsored projects. Charges must reflect the work performed and be supported by the institution's system of internal control and documentation. Institutions should also monitor cost sharing and matching commitments, indirect cost treatment, program income, and equipment purchases.

Procurement and Subrecipient Oversight Require Early Attention

An institution may follow its normal purchasing policy and still fail to meet award-specific or federal procurement requirements. Institutions should address competition, conflict-of-interest standards, required contract provisions, suspension and debarment checks, and documentation of the procurement method before making a commitment. A procurement problem can be difficult to correct after goods or services have been received.

Research collaborations and other sponsored activities also require institutions to distinguish subrecipients from contractors. When another organization is carrying out part of a federal program, the institution may have subrecipient monitoring responsibilities. These can include communicating required award information, evaluating risk, reviewing financial and performance reports, following up on deficiencies, and making sure that corrective action is taken when necessary. Treating a subaward as an ordinary vendor arrangement can leave significant compliance obligations unaddressed.

Coordination Across Campus Is Essential

Grant compliance is rarely the responsibility of one office. Principal investigators and program directors understand the project; sponsored program’s staff interpret award terms; financial aid offices administer student aid; procurement selects vendors; human resources and payroll process compensation; finance records transactions and prepares external reports; and internal audit or compliance personnel may provide independent oversight.

Problems arise when key information does not move among these groups. A department may begin spending before an account is properly established. Purchasing staff may not know that federal requirements apply. Finance may not receive complete information about pass-through awards or subawards. Financial aid and general ledger records may not reconcile. Institutions should assign clear ownership for award setup, compliance review, monitoring, reporting, and closeout, while recognizing that effective compliance is still a shared responsibility.

SEFA and Single Audit Risks Go Beyond the Finance Office

An incomplete inventory of federal awards can result in an incomplete SEFA and an incorrect assessment of whether a Single Audit is required. This risk is especially important in higher education because federal activity may be administered through financial aid, sponsored research, academic departments, affiliated organizations, and pass-through arrangements. Federal awards should be identified and accumulated throughout the year rather than reconstructed only during the audit.

Institutions should reconcile the SEFA to the general ledger and supporting systems, investigate differences, and confirm that expenditures are reported in the correct period and under the correct federal program or cluster. They should also consider awards received in noncash form, federal loans or loan guarantees when applicable, subrecipient activity, and amounts administered outside the central grants office. Even when funds were spent appropriately, inaccurate classification or incomplete reporting can lead to audit adjustments and findings.

Build Compliance Into the Award Life Cycle

A strong grant process starts with a formal award-intake review. Before spending starts, the institution should document the funding source, determine whether it is a direct federal award or a pass-through award, identify the ALN and pass-through information when applicable, assess key compliance requirements, establish appropriate accounting codes, and assign responsibility for administration and oversight.

A centralized award inventory or grant-tracking system should capture, at a minimum, the award number, funding source, project period, budget, matching or cost-sharing requirements, indirect cost terms, reporting deadlines, responsible individuals, subawards, and closeout status. Grant files should retain the award documents, amendments, approvals, procurement support, payroll documentation, invoices, reports, correspondence, and evidence of monitoring.

Periodic reviews are equally important. Institutions should compare spending with the approved budget, identify inactive awards, monitor approaching deadlines, reconcile drawdowns and reimbursements, review subrecipient activity, and resolve compliance questions while supporting information is still available. Closeout should include final financial and performance reporting, removal of unallowable or unresolved costs, disposition of property when required, and confirmation that records will be retained for the applicable period.

The Key Takeaway

Effective grant management is more than ensuring that funds support an academic or institutional purpose. It requires the institution to identify the true source of funding, apply the correct rules, coordinate responsibilities across campus, maintain reliable accounting and documentation, and monitor compliance from award acceptance up to closeout.

For every new award, the institution should answer three questions early: What is the source of the funding? Which requirements apply? Who is responsible for each compliance obligation? Getting those answers right at the beginning can prevent costly corrections at year-end and help the institution protect both its funding and its reputation.