The Path to Compliance, Part One: Procurements Using Federal Funds

Federal grants can be a key part of a nonprofit’s funding and operations. However, many financial professionals struggle to understand and apply the various compliance requirements the federal government expects of grant recipients. This series of articles provides practical guidance to assist nonprofits with federal grant compliance.

In this article, we will go over key items that will help nonprofit financial professionals understand the procurement standards presented within the Uniform Grant Guidance (UGG). A copy of the UGG can be found at the eCFR website.

The federal procurement standards are contained within §200.317 through §200.327 of the UGG. Do not be afraid to read these sections. There are only nine pages of text, and for the most part, it is not dense reading. The text clearly articulates what the federal government expects when it comes to procurements made with federal funds.

Defining a Procurement

First, it is critical to know what the term “procurement” means in this context. Simply put, a procurement event occurs when a nonprofit purchases goods or services from a third party. For example, transactions with suppliers, vendors, and contractors would be considered procurements. When these purchases are made with federal funds, federal procurement standards must be followed.

It is important to note that the procurement standards only apply to costs charged directly to a federal program. Costs that are included within a nonprofit’s indirect cost pool would not be subject to federal procurement standards.

The Purpose of the Federal Procurement Standards

The overall purpose of the federal procurement standards is to ensure goods and services purchased with federal funds provide appropriate value to the federal program. This is achieved by documenting procurement procedures and vendor selection decisions; removing conflicts of interest; and open competition.

Documented Procurement Policies

Procurement standards require nonprofits to have written procedures in place that meet the requirements outlined in §200.317 through §200.327 of the UGG. These documented procedures must be consistently followed. Failing to document and adhere to procurement procedures will result in an audit finding.

It is important to understand that when a nonprofit chooses to set procurement procedures that are more restrictive than the federal requirements, the nonprofit must follow the more restrictive procedures. For example, the federal micro-purchase threshold is currently $10,000. Say ABC Nonprofit states in its procurement procedures that only procurements equal to or less than $2,500 can use micro-purchase methods. In this case, for federal procurement purposes, ABC Nonprofit’s micro-purchase threshold is $2,500, even though federal guidance sets the threshold at $10,000.

Open Competition

As noted earlier, subjecting federal procurements to open competition is a key tenet of procurement compliance. When a nonprofit selects vendors and service providers, the UGG provides for the use of informal competition, formal competition, and sole-source acquisitions.

Informal Competition

Many procurements made by nonprofits are considered small purchases and qualify for informal competition procedures. In general, the simplified acquisition threshold (SAT) for small purchases is set at $250,000. This means that in most cases, federal procurement decisions for purchases less than $250,000 may use informal competition procedures.

At a minimum, informal competition procedures involve obtaining an adequate number of price quotes from qualified vendors/service providers. The nonprofit has discretion in determining what constitutes an adequate number of price quotes, and this can change depending on the nature of the purchase. When using informal competition procedures, the nonprofit should document the pricing information and the rationale for selecting the vendor/service provider. The point is to show that the cost was reasonable and the federal program is receiving the appropriate mix of cost and value from the vendor/service provider to achieve the program’s objectives.

Purchases that do not exceed $10,000 can qualify as a micro-purchase. Procurements that are considered micro-purchases do not need to show competitive price quotes. Instead, the nonprofit must simply show that the price was considered reasonable based on factors such as past experience or market conditions.

The nonprofit should do its best to allocate micro-purchases equitably to various qualified vendors. For example, if muffins for stakeholder meetings are an allowable cost under the federal program, and there are three similar bakeries in town, the nonprofit should rotate its muffin purchases between the three bakeries.

Sole Source

Certain procurements may involve highly specialized goods or services. In these cases, sole-source (noncompetitive) acquisitions may be made. When using sole-source acquisitions, it is vital that the nonprofit maintain documentation explaining why the use of sole-source procedures was appropriate. If the sole-source vendor/service provider is known when the grant proposal is being prepared, it should be named in the proposal. If the vendor/service provider is not named in the grant proposal, it is a good idea to inform the federal agency of the use of sole-source procedures and obtain the agency’s approval. Since using noncompetitive procurement procedures carries a higher risk of noncompliance, transparency and documentation are key.

Formal Competition

Procurements exceeding the SAT of $250,000, and that do not qualify for sole-source acquisitions, must generally use formal procurement procedures. Formal procurement procedures consist of either sealed bids or proposals. §200.320(b)(1) and §200.320(b)(2) of the UGG discuss the process for sealed bids and proposals, respectively. Nonprofits required to utilize formal procurement procedures should carefully read these sections.

Conflicts of Interest

The UGG specifically states that nonprofit organizations must have written policies addressing any conflicts of interest for employees, officers, or agents involved in federal procurement decisions. Fortunately, many nonprofits already have a conflicts of interest policy in place. However, the existing policy should be compared against the requirements outlined in §200.318(c) of the UGG to ensure the policy meets all applicable requirements.

Documentation of Vendor Selections

A common theme within the federal procurement standards is the importance of maintaining documentation that supports procurement decisions. At a minimum, records should show the rationale for the procurement method used, the nature of the agreement, the basis for the contract’s price, and why a vendor/service provider was selected.

As part of the documentation process, nonprofits should also show that vendors/service providers are not excluded from participating in federal contracts. This can be done by searching the excluded parties list system at sam.gov/content/exclusions and printing the search results. The search should be done prior to entering into the contract with the vendor/service provider.

Finally, although it may seem intuitive, the standards require that federal procurements are made only for goods or services that are necessary under the federal program. In many cases, the grant proposal and budget can serve as documentation of the need for the procurement. Still, nonprofits should be able to produce documentation that shows the necessity of procurements for items that are not obviously contemplated within the grant proposal or budget.

Conclusion

At first glance, the federal procurement requirements can appear confusing and daunting. Fortunately, after reviewing them, most nonprofits should find that the concepts and procedures contained within the UGG make logical sense. Nonprofits that commit to understanding and adhering to the procurement standards should find that compliance is not onerous and allows them to make the best purchase decisions on behalf of their federal programs.

If you have any questions about this article or how we can help your organization with federal procurement compliance, contact Doug Boedeker at [email protected].

Read Other Articles from the Series

• The Path to Compliance, Part One: Procurements Using Federal Funds
• The Path to Compliance, Part Two: Identifying Subrecipients of Federal Funds
• The Path to Compliance Part Three: Cash Management Considerations of Federal Awards
• The Path to Compliance Part Four: The Schedule of Expenditures of Federal Awards (SEFA)