Federal Contracting for Nonprofits: Grants vs. Contracts and How to Compete

Many nonprofit organizations limit their federal government revenue strategies to grants — and miss out on the larger, more predictable federal contracting market. Federal agencies award billions annually in contracts to nonprofit organizations for research, human services, technical assistance, training, and professional services.

Contracting is different from grant funding in fundamental ways — and those differences can make contracts a more reliable income stream for nonprofits with the right capabilities.

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Grants vs. Contracts: Understanding the Difference

The distinction between a federal grant and a federal contract determines the legal framework, compliance obligations, and how you can use the funds.

Federal Grant

A grant is a financial assistance mechanism. The government uses grants when:

• The principal purpose is to accomplish a public purpose (rather than acquire a service for the government's direct benefit)
• The recipient has substantial discretion over how to achieve outcomes
• The relationship is primarily one of financial support, not purchase

Grants are governed by 2 C.F.R. Part 200 (Uniform Guidance) — including cost principles for nonprofits (Subpart E), audit requirements (Single Audit at $750K in federal awards), and administrative requirements.

Federal Contract

A contract is a legal agreement for the purchase of goods or services. The government uses contracts when:

• The principal purpose is to acquire something for the government's direct use or benefit
• The government specifies what it wants and how it wants it delivered
• The relationship is buyer-seller, governed by the Federal Acquisition Regulation (FAR)

Contracts are governed by the FAR, the FAR cost principles at Part 31, and agency-specific supplements (DFARS, etc.).

Key difference: Grants give you mission flexibility. Contracts make you accountable for delivering specific deliverables to government specifications.

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Can Nonprofits Compete for Federal Contracts?

Yes. Nonprofits are eligible for federal contracts under the FAR. Nothing in the FAR prohibits award to a tax-exempt organization.

Nonprofits compete successfully for contracts in:

• Research and evaluation (social science, public health, policy evaluation)
• Technical assistance (capacity building, training delivery, workforce programs)
• Human services delivery (case management, employment services, housing counseling)
• Education and training (curriculum development, instructor services)
• Healthcare (community health programs, behavioral health services, clinical services)
• Environmental (community outreach, environmental justice, monitoring)
• IT and data (analytics, program management systems, data quality)

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Nonprofit Cost Accounting Under FAR Part 31

When a nonprofit wins a federal contract, cost allowability is governed by FAR Part 31 — specifically FAR 31.701 and the nonprofit-specific cost principles.

Key cost distinctions for nonprofits:

Unallowable costs under FAR Part 31 that nonprofits often misunderstand:

• Fundraising costs — costs of raising contributions from donors are unallowable on federal contracts (2 C.F.R. 200.442 and FAR 31.205-1)
• Lobbying costs — costs of influencing legislation or federal procurement decisions are unallowable (FAR 31.205-22)
• Contributions and donations — costs of making charitable contributions are unallowable (FAR 31.205-8)
• Membership in certain organizations — professional association dues may be partially unallowable if the association engages in lobbying

Indirect cost rates: Nonprofits typically establish indirect cost rates for overhead recovery. Options include:

• Negotiating a rate with your cognizant federal agency (for nonprofits with significant federal contract volume, the HHS Division of Cost Allocation or DoD DCAA)
• Using a de minimis rate of 10% of modified total direct costs (available under 2 C.F.R. 200.414(f) for organizations that have never had a negotiated indirect cost rate)
• Negotiating a predetermined rate or fixed rate with carryforward

Separating grant and contract indirect costs: If your nonprofit has both grants and contracts, you must carefully track and allocate indirect costs consistently. Different indirect rates may apply to different funding types — ensure your cost accounting system can distinguish them.

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SBA Certifications for Nonprofits

Not all SBA small business certifications are available to nonprofits:

8(a) Business Development Program: Nonprofits are not eligible for the SBA 8(a) program. 8(a) is limited to small businesses that are for-profit and at least 51% owned and controlled by socially and economically disadvantaged individuals.

HUBZone Program: Nonprofits can potentially qualify for HUBZone certification if the principal office is in a HUBZone and at least 35% of employees reside in a HUBZone. The SBA has certified some nonprofits under HUBZone.

WOSB/EDWOSB: Nonprofits are generally not eligible since the program requires for-profit status.

SDVOSB: Requires ownership and control by a service-disabled veteran; generally not compatible with nonprofit governance structures.

SBA small business size standards: Nonprofits can qualify as "small businesses" under SBA size standards — employee-based size standards apply to nonprofits the same way as to for-profits.

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How Nonprofits Win Federal Contracts

Play to Your Mission Strengths

Nonprofits often have competitive advantages in contracts that align with their mission:

• Community trust and relationships — for programs requiring community engagement or outreach to underserved populations
• Specialized expertise — domain knowledge in narrow policy areas (housing, veterans services, early childhood development)
• Existing infrastructure — facilities, established community networks, existing programmatic infrastructure that reduces startup costs

Register in SAM.gov as a Nonprofit

SAM.gov registration for nonprofits follows the same process as for-profits. Your entity type will reflect nonprofit status (typically "Non-Profit Organization"). Ensure your NAICS codes reflect your actual service capabilities, not just your charitable mission.

Understand the Competition

On research, evaluation, and policy work, nonprofits often compete against:

• For-profit management consulting firms
• Other nonprofits (think tanks, research institutes, advocacy organizations)
• Universities

For service delivery contracts, competition may include:

• For-profit social services companies
• Government agencies in cooperative agreements
• Other nonprofits with comparable program experience

Structure Your Costs Competitively

Nonprofits sometimes price contracts too low (mission-driven underpricing) or too high (inadequate cost accounting). Both are problems:

• Underpricing that leaves out indirect costs leads to losses and unsustainable programs
• Overpricing that misclassifies fundraising or development costs as allowable overhead is a False Claims Act risk

Work with a cost accountant experienced in nonprofit government contracting to properly structure your indirect cost rates and direct cost buildup.

Build a Track Record

Federal agencies want contractors with proven performance. Nonprofits entering the federal contracting market should:

• Start with smaller contracts or subcontracts to build CPARS past performance
• Leverage existing grant relationships — program officers who know your work may be able to refer you to contracting officers
• Consider teaming with established government contractors to access larger competitions while building your own track record

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Common Traps for Nonprofits Entering Federal Contracting

Commingling grant and contract accounting: Grant reporting and contract invoicing have different rules. Keep your accounting systems separate for each funding type.

Unallowable costs in contract overhead: If your indirect cost pool includes fundraising, development, or lobbying costs, those costs cannot be allocated to federal contracts. Establish separate cost pools for allowable and unallowable indirect activities.

Inadequate internal controls: Federal contracts require financial management systems with adequate internal controls (FAR 16.301-3 for cost-reimbursable; DCAA audit standards). Many nonprofits running on grant-oriented accounting systems need upgrades before pursuing large cost-reimbursable contracts.

Ignoring the Davis-Bacon Act and Service Contract Act: Service delivery contracts often trigger the Service Contract Act (SCA), requiring payment of prevailing wages and fringe benefits for covered employees. Nonprofits that assume their normal compensation structures are adequate may be in violation.

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Key Takeaways

• Nonprofits can win federal contracts — the FAR does not exclude tax-exempt organizations; many compete successfully in research, services, and technical assistance.
• Contracts differ from grants in fundamental ways — specific deliverables, buyer-seller relationship, FAR governance — and often provide more predictable, larger revenue streams.
• FAR Part 31 governs allowable costs — fundraising, lobbying, and contributions are unallowable; proper indirect cost rate structure is essential.
• 8(a) and WOSB are unavailable to nonprofits; HUBZone may be available; size standards apply to nonprofits as they do to for-profits.
• Separate cost accounting for grants vs. contracts is essential — commingling creates audit risk and false claims exposure.
• Build past performance on smaller contracts before pursuing large prime competitions — use subcontracting and existing program relationships to establish CPARS ratings.

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