You just received notice of a federal grant award. The funding is confirmed, the budget is approved, and the performance period is about to begin. The first 30 to 60 days are not a grace period; they are the window in which you either build a compliance foundation that holds up under scrutiny or inherit problems that compound with every passing quarter.
Federal compliance requirements under 2 CFR Part 200 apply from day one of your award period.1 There is no provisional phase. If an auditor reviews your first quarter and finds that your financial management system could not isolate grant expenditures by cost category, the finding covers every transaction processed during that period.
Before You Spend a Dollar
1. Read Your Award Terms in Full
Your award notice is not a formality. It contains reporting deadlines, prior approval requirements, and spending restrictions that vary by agency and program. These terms are legally binding. Organizations that skim the notice and begin spending based on the approved budget alone routinely discover restrictions they violated months earlier, often during a desk review when corrective options are limited. Read the entire document before any funds are drawn down and build a calendar of every deadline. If your award includes subaward components, the pass-through requirements in 2 CFR 200.332 create additional obligations that first-time recipients overlook entirely.2
2. Verify Your Financial Management System
Federal regulations require that your accounting system can track expenditures by individual federal award and by cost category.3 Your chart of accounts must isolate grant-funded costs from other organizational spending. If your organization runs everything through a single general fund, establish separate tracking before the first expenditure posts. At minimum, your system must identify all federal awards received and expended, record expenditures by cost category against the approved budget, compare actual spending to budgeted amounts on a recurring basis, and generate the financial reports your awarding agency requires. If it cannot do all four, the system itself is a compliance gap.
3. Establish Written Policies
Auditors do not test whether your organization handles procurement or travel reimbursement reasonably. They test whether your organization follows its own written policies, and whether those policies align with federal requirements. If the policies do not exist, the finding covers the entire period under review, not just the point at which the gap was identified. The following policies should be in place before any grant-funded activity begins:
- Procurement: How you solicit, evaluate, and document purchases, aligned with the method thresholds in 2 CFR 200.320.4
- Travel: Reimbursement rates, approval requirements, and documentation standards.
- Time and effort: How employees document time charged to federal awards.
- Conflict of interest: Standards of conduct for employees engaged in awarding or administering contracts.5
- Cash management: How you manage the timing of federal fund drawdowns to minimize the time between receipt and disbursement.6
- Allowable costs: Organizational criteria for determining whether costs are necessary, reasonable, and allocable.7
4. Set Up Segregation of Duties
No single person should control a financial transaction from initiation to completion. This is a specific internal control requirement under the Uniform Guidance, not an abstract best practice.8 Map your current workflows for purchasing, payroll, and bank reconciliation. Where one person has unchecked authority over a complete transaction cycle, assign a second person to approve or review. If limited staff makes full separation impossible, document the compensating controls you use (such as board-level financial review) because an auditor will ask.
5. Implement Time Tracking
If any employee’s salary or wages will be charged to the grant, you need a system for documenting how their time is allocated across funding sources. The records must be contemporaneous: created when the work is performed, not reconstructed afterward.9 A semi-monthly timesheet reviewed and signed by a supervisor meets the standard. The system must be consistent, applied to every charged employee, and produce records verifiable against payroll. Organizations that rely on after-the-fact estimates or percentage-based allocations without documentation face some of the most common Single Audit findings in the country.
During the Grant Period
6. Monitor Budget-to-Actual Spending Monthly
Compare actual expenditures to your approved budget monthly. Federal awards generally require prior written approval before transferring funds between budget categories beyond certain thresholds.10 If you are trending toward an overspend and do not request a modification in advance, you risk having those costs disallowed entirely. Some agencies will not approve retroactive changes at all.
7. Document Every Procurement Decision
For every purchase made with federal funds, maintain documentation of the procurement method used, the selection rationale, the price analysis, and any conflict of interest disclosures. The micro-purchase threshold (currently $10,000 following the 2024 revision) reduces the level of competition required but does not eliminate the documentation requirement.11 Procurement findings are among the most frequent in Single Audits because organizations assume small purchases do not require paperwork.
8. Submit Reports on Time
Federal financial reports (SF-425) and programmatic reports are due on the schedule specified in your award terms. Late submissions can trigger payment holds and increased monitoring. Build every reporting deadline into your organizational calendar with advance reminders. The data required for these reports should come directly from your accounting system; if it does not, your tracking infrastructure has a gap that will surface during an audit.
9. Retain Everything
The standard record retention period under 2 CFR 200.334 is three years from the date of submission of the final expenditure report.12 Some programs require longer retention. All financial records, supporting documentation, and other materials pertinent to the award must be retained and accessible throughout this period. Establish a records management system now, while the files are current. Reconstructing documentation years later for an audit is expensive and sometimes impossible.
The Single Audit Threshold
If your organization expends $1,000,000 or more in federal awards during a fiscal year, you are required to undergo a Single Audit.13 This independent audit examines both your financial statements and your compliance with federal award requirements. The results are publicly available through the Federal Audit Clearinghouse; future funders and oversight bodies can see your findings.
Even below the Single Audit threshold, your awarding agency retains the right to audit your records. The compliance infrastructure you build now applies regardless of audit status. The average cost of remediating a Single Audit finding ranges from $22,000 to $144,000 or more.14 The infrastructure described in this article costs a fraction of that and prevents the finding from occurring in the first place.
Assess Your Starting Position
If you are not sure where your organization stands on these requirements, a structured assessment can identify the gaps before an auditor does. Our free diagnostic scores your compliance posture across five domains in about 10 minutes, with no account required. You get a detailed report showing exactly which areas need attention and what to prioritize first.
Take the Free Grant Readiness Assessment
Notes
1 2 CFR 200.1 defines the period of performance; compliance obligations attach at the start date specified in the award. See also 2 CFR 200.301 on performance measurement from day one.
2 2 CFR 200.332 specifies requirements for pass-through entities, including subaward documentation, risk assessments, and monitoring obligations.
3 2 CFR 200.302 sets the standards for financial management systems, including the ability to track expenditures by federal award and cost category.
4 2 CFR 200.320 defines the methods of procurement (micro-purchase, small purchase, sealed bid, competitive proposal, noncompetitive) and their applicable thresholds.
5 2 CFR 200.318(c)(1) requires written standards of conduct covering conflicts of interest for employees engaged in the selection, award, or administration of contracts.
6 2 CFR 200.305 governs payment and cash management, requiring recipients to minimize the time between drawdown and disbursement of federal funds.
7 2 CFR 200.403 through 200.405 establish the general provisions for allowable costs, including the requirements for necessity, reasonableness, and allocability.
8 2 CFR 200.303 requires recipients to establish and maintain effective internal controls that provide reasonable assurance of compliance, consistent with the Standards for Internal Control in the Federal Government (GAO Green Book).
9 2 CFR 200.430(i) establishes the standards for documentation of personnel expenses, including the requirement that records reflect an after-the-fact distribution of actual activity.
10 2 CFR 200.308 governs revision of budget and program plans, including the thresholds beyond which prior written approval is required.
11 The micro-purchase threshold was revised to $10,000 under the 2024 amendments to 2 CFR Part 200. See 2 CFR 200.320(a)(1). Documentation requirements under 200.318(i) still apply.
12 2 CFR 200.334 establishes the three-year retention requirement, measured from the date of submission of the final expenditure report or, for certain records, from the date of resolution of any audit findings.
13 The Single Audit threshold was raised from $750,000 to $1,000,000 under the 2024 revisions to 2 CFR Part 200, Subpart F (200.501). OMB issued the final rule effective October 1, 2024.
14 Remediation cost estimates based on aggregated Single Audit data from the Federal Audit Clearinghouse and published analyses of corrective action plan implementation costs across non-profit and governmental recipients.
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