Grants vs. Contracts

People have often asked me what the technical difference is between a contract and a grant. The difference is not about the dollar value or who the purchasing entity is or the type of work being done. Instead, it is about the legal concept of default. In my opinion, the cornerstone of whether something should be called a grant or a contract lies in whether one is legally obligated to produce results as one is in a contractual relationship or simply given funds to do something. Did you get that tint? Maybe that’s oversimplifying it.

Essentially, a contract is a legally binding document in which the parties agree to deliver a product or service in exchange for consideration (usually money). On the other hand, a grant is when one party gives funds to another party to do something, in reasonable hope that the task can be accomplished. If the task is accomplished, great, everyone is happy and it could lead to more grants! On the other hand, if the task is not fulfilled, there will most likely be no legal ramifications (assuming no other laws have been broken), as would be the case in a contract.

If we were to compare and contrast the two mechanisms we would say that a contract has two parties exchanging promises where one party delivers and one party pays. However, a grant has two parts where one part gives the money and one part accomplishes the goals in hopes of achieving them. Do you see the difference now?

In summary, the difference between the two mechanisms – subsidy vs. contract deals primarily with the legal concept of breach. If you break a contract, you are in “default” and you can reasonably assume that some justifiable action can be taken against the party that did not live up to its end of the bargain. However, if you default on a grant, at the very least you can be sure that you won’t have any financial or legal repercussions.

However, from a business perspective, if you do not produce under either mechanism, it is quite likely that you will never receive such funding in the form of a grant or contract again. As much as he doesn’t go to jail, he may be wondering where his next meal will come from and defending his good name.

Consequently, if you are in the field of public procurement, it is always advisable to ensure that you understand which instrument you are working under. If you are faced with using a contract instead of a grant and you are concerned about whether you can achieve a goal or the task at hand, you will definitely want to use a “best efforts” contract. This will allow you to operate as if it were similar to a grant in that you have high hopes of achieving said goal, but ultimately no guarantee that you will be able to deliver.