As fall nears, so do looming, significant proposed rule changes to every attorney’s favorite set of federal regulations—Title 2 of the U.S. Code of Federal Regulations! Title 2 establishes the uniform administrative requirements, cost principles, and audit requirements for receipt of all federal grant awards.  For ease of reading, I will refer to the proposed changes collectively as the “Proposed Rule.[1] 

As the great ’80s band Scorpions says (and I am taking some slight liberties here…), “the future [of the CFR]’s in the air, I can feel it everywhere, blowing with the wind of change [to federal grant administration processes].”  Yep, fun fact: their lead vocalist, Klaus Meine, was a big federal regulation fan. (Okay, I may have just made that part up).   

For background, at the federal administrative level, Congress delegates to executive agencies the authority to issue federal rules, which define how existing laws will be interpreted and enforced. Through the rulemaking process, agencies are required to seek and consider input from the public before implementing final rules.[2]

The process consists of six steps: (1) an agency drafts a proposed rule and submits to the Office of Management and Budget for review; (2) said executive agency issues a notice of proposed rulemaking in the Federal Register; (3) there is a comment period wherein the public is free to comment on the proposed rule; (4)  the executive agency reviews comments, and amends if necessary; (5) the executive agency issues the final rule in the Federal Register; and (6) the proposed rule goes into effect.[3]

Here, the Proposed Rule was originally set to take effect October 1, 2026.[4]  On September 2, 2026, President Trump signed H.R. 6500, the “Continuing Appropriations and Extensions Act, 2027.”[5] Section 157[6] prohibits the Proposed Rule from being issued or finalized until after December 11, 2026.  Thus, the Proposed Rule cannot be finalized until at least December 12, 2026.  It is not certain, however, that the Proposed Rule will be finalized.

Objectives of the Overhaul

Before diving into what the Proposed Rule changes, it’s important to understand why these changes are coming.  Per the Proposed Rule, there are three primary purposes: (1) increasing transparency, accountability, and oversight in the federal grant administration process, (2) clarifying that 2 CFR Part 200 is a regulation rather than guidance, and (3) reducing award-recipient burden.  Each of the proposed changes within the Proposed Rule is identified as falling within one or more of the identified objectives.

Coming Changes to 2 CFR Part 200

Objective 1 – Increasing Transparency, Accountability, and Oversight in the Federal Grant Administration Process

Authority to Suspend or Terminate.  The Proposed Rule creates new and robust authority for agencies to both suspend and terminate federal grant awards.  This new authority is based on new criteria¾including “noncompliance”¾which includes failure to report on subawards, a broad “national interest” determination, and a broad determination that the award “no longer effectuates program goals, agency priorities, or the national interest” as they exist at the time of termination.[7]    Such termination or suspension would be possible even when the award recipient is fully complying with the terms of award of the grant.

For government agencies accepting federal grant awards, this is potentially problematic. The risk of changing administrative priorities creates significant uncertainty for government entities’ budgets. Government budgets are adopted on an annual basis, weeks to months before the fiscal year is set to begin. Revenue projections of federal grant awards can be, and generally are,  factored into budgets.  Now, under the revised language of the Proposed Rule, those (potentially highly relied on) revenue streams run the potential of being cut off mid-stream if administration priorities change mid award.

Cost-Reimbursement Contracts. The Proposed Rule strongly discourages the use of cost-reimbursement contracts.[8]  This is a method commonly used by governments receiving federal awards. A cost-reimbursement contract is a contract under which grant funds are expended by the recipient before they are actually received, then reimbursed after the fact, either directly from a federal agency or indirectly from a pass-through entity.[9] The Proposed Rule grants federal agencies the discretion to require prior approval of such contracts in the award terms and conditions grant recipient must sign in order to receive the award. The Proposed Rule’s justification is that cost-reimbursement contracts are inherently higher risk, as they reduce incentives for contractors to control costs, require more intensive oversight, and run a higher risk of improper payout of federal funds. 

Pass-Through Entity Responsibilities. The Proposed Rule significantly broadens the responsibilities of pass-through entities.[10] This would expand pass-through oversight requirements including subaward reporting to SAM.gov, subrecipient monitoring, and compliance with new policy conditions. Further, the Proposed Rule would require that pass-through entities ensure subrecipients do not take actions that “could significantly damage the reputation” of the pass-through entity, the awarding agency, or the federal government as a whole.[11]  In such actions  do occur, the pass-through entity is required to consult with the granting federal agency to determine whether termination of award is necessary and warranted.

In order to obtain this objective of greater transparency and oversight, pass-through entities would likely be required to shift significant internal resources and potentially increase staffing in order to absorb this additional workload and associated costs.

Remedies for Non-Compliance. The Proposed Rule also includes several significant changes to remedies for noncompliance with grant terms.[12]  In the event of non-compliance, the awarding federal agency may take several actions, including withholding payments to recipients, cost disallowance, suspension or termination of the federal award, and withholding future federal funds. 

This broad, wide-sweeping authority to withhold funds or disallow costs largely does not come along with clear, defined compliance requirements. Consequently, compliance will likely be based on individual grant requirements and variance from federal agency to federal agency.   

Fixed-Amount Grants. Additionally, the Proposed Rule eliminates the “fixed amount” grant structure for both awards and subawards through changes throughout Part 200.[13]   A “fixed amount” grant refers to a type of grant or cooperative agreement in which the federal agency or pass- through entity provides a specific amount of funding without regard to actual costs incurred under the federal award.[14]  The justification within the Proposed Rule is that under the fixed amount grant structure, there is little to no required routine monitoring of actual costs, nor is there any required financial reporting. 

The addition of these monitoring and reporting requirements will fall to the government entities accepting an award or subaward.  The Proposed Rule also freezes indirect cost rates as they were negotiated in 2024—indirect cost rates are a mechanism that is regularly used by government entities to recover administrative overhead associated with additional reporting and compliance obligations.[15] 

Objective 2 – Clarifying Regulatory Characterization

The Proposed Rule clarifies the characterization of the 2 CFR Part 200 regulatory text as an Office of Management and Budget (OMB) regulation. This is a significant shift as, previously, 2 CFR Part 200 was generally considered to be “guidance.” Generally, 2 CFR Part 200 has been considered guiding reference principles for federal grant regulation.  Now, the Proposed Rule would clarify that 2 CFR Part 200 is “regulation” and replaces all references to 2 CFR Part 200 as “guidance” with “regulation.”

Clarifying the characterization of 2 CFR Part 200 will likely have far-reaching implications. Pursuant to Proposed Rule 2 CFR 200.101(d), federal statutes or regulations will govern in any circumstances where they conflict with the provisions of 2 CFR Part 200.  Meaning, in the event of a conflict between OMB’s government-wide regulations and an individual agency’s regulations, the government-wide regulations would trump the individual agency’s regulations.  This will likely result in an amalgamation of grant-regulating power with OBM instead of with individual agencies. 

Objective 3 – Reducing Award Recipient Burden

Objective 3 is a more politically charged. To maintain a factual analysis, this section relies primarily on the Proposed Rule’s own language and does not evaluate or otherwise comment on the policy statements it contains.  According to the Proposed Rule, the justification for  this third objective is “Federal agencies became increasingly focused on using their award programs to serve a ‘woke’ policy agenda that deliberately favored certain identity groups over others.”[16] Thus, “rather than needing to focus extensive efforts and resources on DEI mandates or other unnecessary add-on requirements frequently included in funding opportunities in previous years, under the proposed version of the regulation recipients will be able to restore focus on efficient project delivery and actually achieving the basic public purposes of support authorized in law.”  

This objective is illustrated in changes to 2 CFR 200.300, which limits the use of federal awards, stating that they may not be used to “fund, promote, encourage, subsidize, or facilitate” (1) “Diversity, equity, and inclusion”  or “diversity, equity, inclusion, and accessibility”, (2) “Gender ideology” including “theories or ideologies that deny the biological reality of sex or the sex binary in humans, or endorse or advocate for the notion that sex is a chosen or mutable characteristic,” and (3) “The so-called ‘transition’ of a child under 19 years of age from one sex to another, including the chemical and surgical mutilation of children[.]”[17]  

I won’t comment on the specific effects of these changes; however, governmental entities should be aware of the change and the subsequent compliance requirements, meaning government entities will risk claw-back of grant funds for non-compliance. Additionally, 2 CFR 200.403 establishes that any cost that is considered ‘out of conformance’ with the requirements of 2 CFR 200.300 is an unallowable cost and thus is a violation.

Closing Remarks

In summary, this article highlights a small sampling of the changes coming in this Proposed Rule. These changes represent a significant shift from the current state of federal grant administration, and government agencies and other federal grant recipients should be discussing these changes internally and with their clients, to determine how they will affect their individual processes, compliance, and business risk profiles. 

As Scorpions says, (again, taking some [liberties] here):

Where the [government attorneys] of tomorrow share their dreams [of effective administration of federal grants] (share their dreams)

With you and me (with you and me)

…

In the wind of change [to federal grant administration processes] (The wind of change).

*Note: Nothing in this article (bad attempts at humor included) reflect the views or opinions of Ada County; the views and opinions expressed herein are my own.