Federal Grant vs. Contract: Key Differences Every Applicant Must Know

"I got a federal contract" and "I got a federal grant" sound similar but describe fundamentally different legal relationships with the US government. The legal framework, compliance requirements, accounting standards, intellectual property rights, and performance expectations are all distinct — and confusing them is a costly mistake.

If you are a business, nonprofit, or researcher receiving federal funds, understanding whether you have a contract or a grant shapes every operational and compliance decision.

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The Legal Foundation

Federal contracts are governed by the Federal Acquisition Regulation (FAR), Title 48 of the Code of Federal Regulations. The FAR governs the government's acquisition of goods and services. The legal relationship is buyer (government) and seller (contractor).

Federal grants and cooperative agreements are governed by the Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (2 C.F.R. Part 200), commonly called the Uniform Guidance. Grants are financial assistance — the government providing funds to accomplish a public purpose — rather than a purchase.

The distinction is codified at 31 U.S.C. § 6301–6308 (the Federal Grant and Cooperative Agreement Act of 1977):

• Use a contract when the principal purpose is to acquire property or services for the direct benefit or use of the federal government
• Use a grant or cooperative agreement when the principal purpose is to transfer money to carry out a public purpose
• Use a cooperative agreement (vs. grant) when substantial government involvement in the activity is expected

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Side-by-Side Comparison

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The Principal Purpose Test

The most important concept: what is the primary purpose of the federal funding?

Use a contract if the government primarily benefits — for example, the government needs a software system built for its own use, needs janitorial services for its facilities, or needs an airplane manufactured for its fleet.

Use a grant if the public primarily benefits — for example, funding a university to research a scientific question, funding a nonprofit to deliver social services to underserved populations, or funding a state to implement a workforce training program.

The line gets blurry. An agency may use a grant to fund a study from which it will use the findings — is it acquiring research for government benefit (contract) or funding a public purpose (grant)? The FAA, for example, has historically used both contracts and grants for aviation safety research depending on how directly it uses the results.

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Cost Principles: FAR Part 31 vs. 2 C.F.R. Part 200

Both federal contracts and grants restrict what costs can be charged to federal funding — but the rules differ:

FAR Part 31 (Contracts)

• Applies to cost-reimbursable contracts, T&M contracts, and subcontracts
• Distinguishes allowable, allocable, and reasonable costs
• Specific allowability rules for 50+ cost categories
• Profit is built into the contract price

2 C.F.R. Part 200 Subpart E (Grants)

• Applies to all federal grants, cooperative agreements, and subawards
• Similar structure (allowable, allocable, reasonable) but different specifics
• Specific rules vary by recipient type:
  • Subpart E, §§ 200.400–200.476: Cost principles for nonprofits, institutions of higher education, state/local governments
  • (Superseded OMB Circulars): A-21 (education), A-87 (governments), A-122 (nonprofits) — all consolidated into 2 C.F.R. Part 200 in 2014
• Profit is generally not allowed for nonprofit grantees

Key difference: Under FAR Part 31, profit is a legitimate contract element. Under 2 C.F.R. Part 200, most nonprofit recipients cannot include profit — they can only recover costs.

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Intellectual Property Rights

Contracts (FAR Part 27): The government's rights to intellectual property developed under a contract depend on whether the contractor uses government funds exclusively or also uses independent/private funding:

• Fully government-funded development → typically unlimited government rights
• Contractor independently developed prior to contract → contractor retains; government may get limited rights
• Developed partly with government funds and partly independently → negotiated rights

Grants (Bayh-Dole Act for R&D): The Bayh-Dole Act (35 U.S.C. §§ 200–212) gives universities and small businesses that develop inventions under federal grants the right to retain ownership of those inventions. The government retains a non-exclusive, irrevocable license to practice the invention. Bayh-Dole applies to grants and cooperative agreements, not contracts (though FAR 52.227-11 implements similar provisions for contracts with small businesses and nonprofits).

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Audit Requirements

Contracts: DCAA audits cost-reimbursable contracts for defense agencies. Civilian agency contracts may be audited by DCAA under interagency agreement or by agency inspectors general. Audit focuses on claimed costs, EVMS compliance, and accounting system adequacy.

Grants: The Single Audit (formerly A-133 audit) applies to any non-federal entity that expends $750,000 or more in federal awards in a fiscal year. A Single Audit examines the organization's financial statements and federal program compliance across all grant programs, not just one. Findings are reported to the Federal Audit Clearinghouse (FAC) and are publicly accessible.

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Procurement and Competition

Contracts: Federal agencies must follow the FAR's competition requirements — full and open competition, or documented exceptions. Solicitations through SAM.gov, industry notification, and formal proposal processes.

Grants: Federal grant competitions follow program-specific statutory requirements, not the FAR. Agencies publish Notices of Funding Opportunity (NOFOs) on Grants.gov. Competition rules vary widely by program. Some grants are formula-based (no competition; states receive based on population or other factors); others are highly competitive merit-based awards.

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Subawards vs. Subcontracts

When a prime recipient passes federal funds to another organization:

Subcontract (under a prime contract): The prime contractor awards a subcontract to a vendor for services the prime needs to perform the prime contract. The subcontractor is a vendor; the relationship is commercial.

Subaward (under a grant): The prime recipient (pass-through entity) makes a subaward to a subrecipient to carry out part of the federal program. The subrecipient must comply with grant requirements; they are accountable for program outcomes, not just deliverables.

The distinction matters: subcontractors are paid for services; subrecipients are funded to accomplish program objectives. A subcontractor doesn't need to comply with grant programmatic requirements; a subrecipient does.

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When Does the Distinction Matter to Your Business?

Registering in SAM.gov: Both contractors and grant recipients need SAM.gov registration. Grants.gov is separate for most grant applications (but SAM registration is required).

Accounting systems: FAR Part 31 compliance requires accounting systems adequate for government contracting (DCAA-approvable). Grant accounting needs to meet 2 C.F.R. Part 200's internal control requirements, which are less prescriptive but still demanding.

Matching requirements: Grants often require matching contributions from the recipient. Contracts do not.

Program reporting: Grants typically require program performance reporting (what outcomes were achieved) in addition to financial reporting. Contracts typically require deliverable submission and financial invoicing.

For-profit eligibility for grants: Not all federal grant programs accept for-profit applicants. Many R&D and social services programs limit awards to nonprofits, universities, or state/local governments. Read the eligibility requirements in the NOFO carefully.

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Key Takeaways

• Contracts = procurement (FAR); the government buys goods/services for its own use. Grants = financial assistance (2 C.F.R. Part 200); the government transfers funds for a public purpose.
• Cost principles differ: FAR Part 31 for contracts; 2 C.F.R. Part 200 for grants — same conceptual framework (allowable, allocable, reasonable) but different specifics.
• Profit is a contract element; it is generally not allowed for nonprofits on grants.
• IP rights: Bayh-Dole applies to grant-funded inventions (grantee retains, government gets license); FAR Part 27 governs contract IP (rights depend on funding source).
• Audit: DCAA for cost-reimbursable contracts; Single Audit (at $750K threshold) for grant recipients.
• Both require SAM.gov registration — but grants use Grants.gov for applications and have program-specific competition rules, not FAR procurement rules.

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