What Is a Restricted Grant and How Does It Work?
Discover what restricted grants are and how their specific conditions govern their application and accountability.
A grant is a financial award from a grantor to a grantee, typically for a specific purpose and without repayment expectation. While some grants offer recipients broad discretion (“unrestricted” grants), others are “restricted,” coming with specific conditions on how funds must be used. This distinction is important for organizations seeking and managing external funding.
Understanding Restricted Grants
A restricted grant is a financial award with specific stipulations or limitations imposed by the grantor on how funds can be spent. These restrictions define the permissible uses of the money, often tying it to a particular project, program, or timeframe. Grantors impose these restrictions to ensure funds are used as intended and align with their mission or objectives.
Common grantors include private foundations, government agencies, and corporations; typical grantees are non-profit organizations, educational institutions, and research entities. For example, a foundation might provide a grant specifically for a literacy program. If an organization fails to use restricted funds as specified, the grantor may demand repayment or pursue legal action. Organizations therefore meticulously account for these funds, often classifying them as “net assets with donor restrictions” until the conditions are met.
Common Types of Restrictions
Restrictions on grants can take several forms, each guiding how the recipient must use the financial award.
Purpose-based restrictions: Funds must be used for a specific project, program, or activity, such as supporting medical research or a youth mentorship program.
Time-based restrictions: Funds must be spent within a defined period, for instance, by a specific fiscal year-end or over a multi-year period.
Capital or asset acquisition restrictions: Funds are earmarked for the purchase of certain assets or infrastructure, like new laboratory equipment or building renovations.
Geographic restrictions: Funds must be used in a particular location or region, supporting initiatives within a defined community.
Matching requirements: The recipient must raise a certain amount of funds from other sources to unlock or fully utilize the grant.
Financial Management of Restricted Grants
Organizations receiving restricted grants must implement specific financial practices to ensure proper stewardship.
Segregate restricted funds from unrestricted funds within the accounting system, often using separate ledger accounts or fund accounting principles. This allows for clear tracking of how each dollar is spent according to its specific limitations.
Meticulously track expenditures to confirm they align precisely with the grant’s specified restrictions and approved budget.
Maintain accurate record-keeping, including retaining all invoices, receipts, and payroll records to support every expenditure related to the grant.
Establish internal processes for budgeting, monitoring spending, and managing the drawdown or disbursement of funds in adherence to the grant agreement terms.
These practices help prevent commingling of funds and ensure accountability.
Compliance and Reporting Requirements
Recipients of restricted grants have external obligations and formal reporting processes required by grantors. Organizations must submit regular financial reports (e.g., expenditure reports, budget-versus-actuals) and programmatic reports detailing activities. These reports demonstrate fund usage and progress toward objectives. Adherence to grantor-set formats, templates, and deadlines is essential.
Grantors may also conduct site visits or audits to ensure compliance. Non-compliance can lead to repayment demands, loss of future funding, and reputational damage. Maintaining comprehensive documentation throughout the grant lifecycle is crucial for meeting these requirements.