Grant-funded organizations must be vigilant in selecting and managing relationships with advisors, consultants, grant writers, and business incubators. When these relationships involve or encourage practices that violate grant regulations—such as paying contingent fees from grant funds or routing payments through intermediaries who take a percentage for administration—organizations risk severe compliance issues, financial penalties, and reputational harm. This article outlines best practices for avoiding and, if necessary, terminating such relationships to safeguard your organization and its funding.

Recognizing Problematic Relationships

Grant Writers Charging Contingent Fees

• Issue: Some grant writers get paid an upfront fee and demand a contingent fee if you win the grant. They may also tell you to pay the fee directly from the grant funds. The government expressly bans this practice under most federal grant programs, including SBIR/STTR.
• Why It’s Wrong: Contingent fees incentivize grant writers to secure funding at any cost, regardless of project integrity, and are considered unallowable expenses. Paying such fees with grant funds can result in audit findings, repayment demands, and debarment from future awards.
• Red Flag: Any advisor who tells you to pay the contingent fee with your grant funds is not acting in your best interest and is putting your organization at risk.

Business Incubators and Payment Intermediaries

• Issue: Some business incubators require grant recipients to deposit grant funds into the incubator’s bank account. The incubator then pays bills on behalf of the organization and charges a fee (e.g., 10% of the grant funds) for “administration.”
• Why It’s Wrong: This practice often violates grant terms, which typically require funds management by the awardee and not by a third party. It may also obscure transparency, create opportunities for misuse, and result in unallowable administrative fees.
• Red Flag: Avoid any arrangement where grant funds flow into another organization’s bank account.

Avoiding Noncompliant Relationships

• Establish Clear Policies: Develop and enforce a conflict of interest policy and a code of conduct for all advisors, consultants, and service providers. Require them to review and agree to these policies before engaging their services.
• Screen Advisors Thoroughly: Before hiring, research the advisor’s reputation, ask for references, and ensure they are familiar with federal grant regulations.
• Require Written Agreements: All contracts should specify allowable fees, payment methods, and compliance requirements. Prohibit contingent fees and any arrangement that compromises your control over grant funds.
• Train Staff: Educate your team about grant compliance and the risks associated with working with advisors who suggest or require noncompliant practices.

Terminating Noncompliant Relationships

• Act Promptly: If you discover that an advisor or service provider is violating or encouraging the violation of grant regulations, terminate the relationship immediately.
• Document the Process: Keep records of all communications and actions taken to end the relationship. This documentation will be essential if you need to demonstrate compliance during an audit.
• Report to Grantors: In some cases, especially in the case of misuse of funds or if you suspect fraud, you may need to notify your grantor and seek guidance on next steps.
• Review Internal Controls: After terminating a problematic relationship, review your internal controls and policies to prevent similar issues in the future.

Examples of Noncompliant Practices to Avoid

• Contingent Fees for Grant Writers: Paying a grant writer only if the grant is awarded and using grant funds for this purpose.
• Payment Intermediaries: Allowing a business incubator or other third party to receive and disburse grant funds, often taking a percentage for “administration.”
• Undisclosed Conflicts of Interest: Hiring family members or close associates as consultants without proper disclosure and justification.
• Unallowable Administrative Fees: Paying excessive or unapproved fees to intermediaries for services that your organization should perform.

Conclusion

Maintaining compliance with grant regulations is essential for the success and sustainability of your organization. By carefully selecting advisors, establishing clear policies, and promptly terminating relationships with those who violate or encourage the violation of grant rules, you protect your organization from financial and legal risks. Always prioritize transparency, accountability, and adherence to federal requirements in all your grant-funded activities.

1. https://grants.nih.gov/policy-and-compliance/policy-topics/fcoi
2. https://www.ojp.gov/tfsc/tfsc_guide_sheet_conflict_of_interest_508
3. https://grants.nih.gov/policy-and-compliance/policy-topics/peer-review/coi
4. https://blog.blackbaud.com/conflict-of-interest-guidelines/
5. https://rco.wa.gov/wp-content/uploads/2023/10/ADV-COI-Policy.pdf
6. https://www.ucop.edu/research-grants-program/_files/documents/srp_forms/rgpo_coi_policy.pdf
7. https://gata.illinois.gov/content/dam/soi/en/web/gata/documents/resource-library/conflict-of-interest-and-financial-disclosures-fy19.pdf
8. https://www.grantthornton.com/insights/articles/nfp/2023/actions-to-take-to-avoid-conflicts-of-interest