Welcome to Feldesman’s Grants Practice Shorts series where we discuss helpful tips and strategies in common areas of federal grant management. Be sure to check out our other installments on our Grants Practice Shorts page.

Prepayment for services is a trap for the unwary grant manager. When considering whether to charge certain expenditures to your federal grant, organizations should take particular care in applying payments for services that extend beyond your budget period. This issue most commonly arises with expenses such as rent, insurance, vehicle leases, and software licenses.

At first glance, one might think that prepaying for a multi-year insurance policy or vehicle lease in exchange for a discounted rate may appear to be a sound financial decision. However, if your grant’s budget period ends before those services are fully delivered, your organization risks having the cost disallowed by the awarding agency.

The Uniform Guidance requires that all costs be incurred during the “approved budget period” (other than administrative closeout costs). While a cost is often recorded on the date it is entered into an organization’s accounting system, an expense is only considered “incurred” when the organization becomes obligated to pay for goods or services that have actually been received. In other words, prepaying for services does not mean the cost has been incurred if the benefit has not yet been realized.

For example, prepaying a two-year insurance premium does not make the full amount allowable in the year of payment if the coverage extends beyond the grant’s period of performance.

Decisions from the HHS Departmental Appeals Board reinforce this principle, emphasizing that costs must not only relate to appropriate cost objectives but also to relevant funding periods as well. Organizations should carefully evaluate prepayments to ensure compliance and avoid potential disallowances.

Feldesman’s federal grants team is available to assist your organization navigate these issues and balance compliance requirements with operational and business considerations. For more information, please contact Phillip Escoriaza or Adam Oppenheim.