When working on grants and contracts, when are paid, how we are paid, and what payments are based on are key considerations.  At times we don’t have any say in how we are compensated, other times we are able to negotiate the payment terms.  Either way, it is important to understand the when, how, and why of the payment types, terms, and conditions from the outset.

Cost-reimburseable agreements

Payment on cost-reimbursable agreements is based on actual expenditures. The sponsor reimburses us for actual allowable and allocable costs spent on a project after expenditures have been made.  Contrary to popular belief, most sponsors don’t put a check in the mail after awarding an agreement.  Instead, the Institution must front the money for the project and invoice the sponsor based on actual, allowable expenditures.

Reimbursement cannot exceed the budgeted amount, and items for which we seek reimbursement should closely follow the awarded budget.  Expenditures should also be made within the sponsor-approved budget period.

On a cost-reimburseable agreement, the Principal Investigator (PI) must put forth his or her best effort on the project.  The good news is that if unsuccessful, the Institution is still reimbursed for expenses incurred, thus the burden of financial risk is on the sponsor.

Fixed-price agreements

Fixed-price agreements are those under which final, full payment is received only after the contractual requirements (i.e., performance or deliverables) have been fulfilled.  If performance measures are not met the sponsor is not obligated to pay; therefore, we may have uncompensated effort and material expenses.  If the performance is met, the sponsor is contractually obligated to pay.  Thus with a fixed-price agreement, the burden of financial risk is on the institution to produce.

Upon completion of the agreement or established milestones, CSU receives only the contracted amount, even if the actual expenditures exceed this amount. Unspent funds remaining after all deliverables have been met will be retained by the University rather than returned to the sponsor.  Because of this, funding requests should be within a reasonable range of actual anticipated expenditures.  An audit-sensitive issue arises when final actual expenditures are substantially less than the amount of the award. As a non-profit organization, CSU must not intentionally generate profit from externally funded activities.  A substantial positive balance can imply that we inappropriately inflated our cost proposals, thereby deliberately generating non-project related income.

Because payment is based on deliverables, it is our practice at CSU to request 50% of the contracted amount upfront, 40% at midpoint, and 10% at the end of the project.  By doing so, we help to alleviate some of the financial risk assumed by the Institution.

Which payment type should I request?

It depends!  We may not be able to request a specific payment type, especially when working with a Federal sponsor under an assistance mechanism.  With non-Federal sponsors, and with procurement (contract) mechanisms, we may have more flexibility.

For assistance awards, payment type is specified in the Uniform Guidance, Subpart C (200.201).  For example, UG tells us that fixed-price awards cannot be used in programs requiring mandatory cost sharing.  For Federal contracts, guidance is provided to contracting officers in the FAR (Federal Acquisition Regulation), Subpart 16.1– Selecting Contract Types.  Factors include, but are not limited to:

• Risk of contractor
• Type and complexity of requirements
• Urgency of requirement
• Contractors’ fiscal capabilities

If given a choice, negotiating a cost-reimbursement payment type is preferable due to minimal financial risks to the Institution.

Comparison

Below is a side-by-side comparison of the two payment types in terms of reimbursement and financial risk to the Institution.

Conclusion

Due to financial risk to the Institution, cost-reimburseable agreements are more desirable than fixed-price agreements.  When in doubt about the payment terms on a sponsored project, contact your OSP liaison.