New rules for grants requiring a convenience termination
And limiting costs for facilities and administration
And if you want these kind of dreams, it’s Contractification[1]
In its continuous drive to alter business as usual, the federal government has made many changes this year to the way it manages financial assistance (grants and cooperative agreements). Executive Order 14332, “Improving Oversight of Federal Grantmaking” (the EO), issued on August 7, 2025, is the latest expression of this new effort and evidences the government’s intent to exert more control over grants and cooperative agreements. As summarized below, the changes generally fall within the inherently flexible framework the government has over such awards, but taken as a whole—and given the framing and rhetoric of the EO—the government’s approach, whether intentional or not, resembles “contractification,” that is, to remake the administration of grants and cooperative agreements to be more like procurement contracts.
The distinction between procurement contracts on the one hand and grants and cooperative agreements on the other is important. If the government wants to buy goods or services, it orders them through a procurement contract. If the government wants to accomplish a public good and partner with an organization (often, but not always, a nonprofit organization, such as a university or a direct service organization), it enters into a grant or cooperative agreement. As a matter of award administration, the government is generally less prescriptive for grants, relying on the grantee’s expertise to develop and implement programming to accomplish the intended public purpose. If the government wants to exert control over the process, contracting provides a chest full of tools with which to accomplish that. The EO blurs that distinction, as it appears intended to provide the federal government with more control over the administration of grants in a manner that makes them more akin to procurement contracts, which can be seen in a few ways.
“Implementation of Termination Clauses”
A key reflection of this intended change in the EO is evident when it states its desire that all awards, current and future, must include clauses enabling the government to terminate a grant or cooperative agreement for “convenience.” A termination for convenience means that the government can terminate an award in the middle of performance “when the award no longer advances agency priorities or the national interest.” In practical terms, an agency can come up with almost any reason to terminate an award, and this contrasts with a termination for cause where the government finds that an awardee has breached the terms of the award.
Although termination for convenience has been part of the Uniform Guidance at 2 CFR 200.340(a)(4) since 2020, many agencies have not incorporated this clause into their standard award provisions. The EO changes that by expressly directing agencies to address this gap through a review of and update to their respective terms and conditions to ensure that future awards expressly allow for termination for convenience. In addition, the EO requires agencies to amend existing awards to include this termination authority.
More Controls: Drawdown Justifications and Limits on Facilities and Administration Costs
Tucked into the EO without much emphasis or highlighting are two other powerful tools for award administration. First, in connection with terminations for convenience, the EO instructs agencies to implement stricter controls over grant funds. Recipients will no longer be able to draw down general grant funds for specific projects without explicit agency approval, and any request to do so must be accompanied by “written explanations or support, with specificity.”
Second, the EO directs the Office of Management and Budget (OMB) to revise the Uniform Guidance “to appropriately limit the use of discretionary grant funds for costs related to facilities and administration.” Those familiar with the Uniform Guidance know that facilities and administrative (F&A) costs represent indirect costs. As the EO makes clear, the federal government seeks to limit those costs, stating its contention that a “substantial portion” of many grants to universities goes to F&A rather than supporting “project applicants or groundbreaking research.”
“Strengthening Accountability for Agency Grantmaking”
Beyond expanding the government’s power to control awards, the EO directs that agencies add layers of review for grantmaking with ultimate decision-making vested in political appointees in coordination with the OMB. Specifically, each agency is required to “designate a senior appointee” who will be responsible for (i) creating a new process to review funding opportunity announcements and (ii) reviewing grants to ensure that they reflect the agencies’ priorities and the “national interest.” The EO establishes a new process for reviewing funding opportunity announcements, requiring the involvement of subject matter experts as needed, interagency coordination to reduce redundancy, and the use of plain language to limit the need for technical or legal expertise when drafting applications. Unless otherwise required by law, agencies may not issue new funding opportunity announcements until this new process is in place.
“Considerations for Discretionary Awards”
The EO sets forth principles that require all grants and cooperative agreements to “demonstrably advance the President’s stated policy priorities.” To that end, the EO explicitly forbids (i) the use of racial preferences, (ii) the “denial by the grant recipient of the sex binary in humans or the notion that sex is a chosen or mutable characteristic,” (iii) providing funding related to “illegal immigration,” (iv) any initiative that compromises public safety, and (vi) any initiative that promotes “anti-American values.”
The EO also sets forth preferences for recipients with lower indirect cost rates, making awards to a diverse group of recipients and not “repeat players,” and that “historical reputation or perceived prestige” should be discarded in favor of institutions’ being committed to “rigorous, reproducible scholarship.” Of note, for “science grants,” the EO directs agencies to prioritize institutions that have demonstrated success in implementing Executive Order 14303, “Restoring Gold Standard Science.”
How to Prepare for and What to Expect From Contractification
We anticipate that through contractification, recipients can anticipate having less control over their input throughout the process as power shifts to agencies in how awards are made and administered. Not only may an agency impose a narrower view of what might make a proposal for an award eligible, it may also change its mind during performance and terminate an award for convenience if the award no longer suits the agency’s goals (e.g., producing data that the agency’s leadership does not like). And while it is not surprising for the executive branch to express policy preferences for federal financial assistance (indeed, the portfolio of awards and identity of recipients should have some churn over time), recipients should be aware that the EO goes beyond mere policy preferences. Instead, the EO seeks to exert maximal control over existing and future awards in a way that eliminates their hallmark flexibility.
Contractifying grants and cooperative agreements also implicates deeper issues regarding the nature of such instruments vis-à-vis procurement contracts. Decades ago, Congress passed the Federal Grant and Cooperative Agreement Act of 1977 (FGCAA), codified at 31 U.S.C. 6301 et seq., to distinguish between procurement contracts, grants, and cooperative agreements. In relevant part, the FGCAA provides that grants should be used when “the principal purpose of the relationship” between the federal government and a recipient is to provide funding for the recipient to “carry out a public purpose” authorized by statute without “substantial involvement” of an agency. See FGCAA, § 6304(1). As Congress passes statutes and appropriates funding, it would seem that agencies would then administer programs to implement such funding. Prescriptive terms and conditions for recipients may undermine the “public purpose” identified by Congress so that such instruments operate more like classic procurement contracts.
The changes imposed radically alter that intent. For example, while terminations for convenience are a long-standing federal procurement tool that government contractors know well, most federal assistance recipients may not be as familiar. Expanded termination for convenience power represents a significant change in the risk profile for grant and cooperative agreement recipients, as we saw in the first quarter of 2025 with the mass terminations of awards (e.g., USAID). While recipients historically have not faced the same level of exposure to sudden termination, if agencies begin regularly exercising this authority, recipients will find their reliance interests disrupted, as funding streams could be cut short—even when they are fully compliant and performing well. New uncertainty in program planning, budgeting, and staffing may leave many research recipients with cost recovery issues if termination occurs mid-performance. In practice, this means that recipients will need to build greater flexibility into how they structure programs and manage funds. Ultimately, recipients will need to recognize that their relationship with the federal government is less of a partnership and more like that of a service provider, where the federal government can reallocate resources to other priorities with little notice.
Similarly, by imposing additional justification for drawdowns and developing limits on F&A costs, the federal government seeks more control over recipients’ spend. While grants and cooperative agreements are already subject to cost principles and various limitations on indirect rates, recipients should be aware that requiring additional justification and imposing limits on certain indirect costs reflect approaches common in cost reimbursement contracting, where agencies can limit their overall exposure on flexibly priced contracts and control costs through various clauses, such as the allowable cost and payment clause and the limitation of funds and limitation of cost clauses. While not as drastic as the termination for convenience power, these changes will impact the relationship between recipients and funding agencies; the flexibility in rate structure and operational tempo will be replaced with essentially a rate cap and more compliance requirements. The overall effect will make instruments for federal financial assistance operate more like contracts.
In sum, recipients of federal assistance must be ready to adapt to the changes of contractification. Of course, much will depend on the timing and substance of OMB’s revised regulations and guidance, but waiting is not an option. Recipients need to plan strategically now—not only to position themselves for future opportunities but also to safeguard and manage their existing award portfolios against future shifts. Failing to prepare—and/or to comply once the new requirements take effect—will expose recipients to increased transaction costs, funding delays, administrative burdens, and enforcement actions.
[1] Inspiration from—and apologies to—the Red Hot Chili Peppers and their song “Californication” (Warner Bros., 1999).
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