When working on grants and contracts, when we 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-reimbursable agreements

Payments on cost-reimbursable agreements are 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 initially finance the project and invoice the sponsor based on actual, allowable expenditures afterwards.

Your notice of an award for a cost-reimbursable agreement will often refer to an obligation; you can think of this as a “promise” to reimburse CSU for costs up to that obligated amount. This obligation is a formal, binding legal commitment for the sponsor to reimburse CSU. Obligations can still be changed (increased, decreased, or cancelled) through a formal award modification. In addition to an obligation, your agreement may also indicate “future,” “expected,” “intended” amounts or an “incrementally estimated total,” which are not binding until they are formally obligated to CSU via an award modification.

Reimbursement cannot exceed the budgeted amount, and the 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-reimbursable agreement, the Principal Investigator (PI) must make 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 incremental and/or final payments are received only after the contractual requirements (i.e., performance or deliverables) have been fulfilled. If performance measures are not met, the sponsor is not required to pay; therefore, we may have uncompensated effort and material expenses. If the performance is met, the sponsor is contractually required 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 actual final expenses are substantially less than the award amount. 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 the midpoint, and 10% at the end of the project. By doing so, we help to alleviate some of the financial risks assumed by the Institution. Please work closely with your OSP Team to ensure the Statement of Work contains clear milestones and deliverables linked to a payment schedule.

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, e.g., grant or cooperative agreement. However, with non-Federal sponsors and procurement (contract) mechanisms, we may have more flexibility.

For assistance awards, the 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:

• Type and complexity of requirements
• Urgency of requirement
• Period of performance
• Contractors’ technical and fiscal capabilities

If given a choice, negotiating a cost-reimbursement payment type is preferable because it involves 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.