As a new year begins and donors consider their giving plans for 2025, we think it’s important to revisit the essential components of a grant agreement. Although written grant agreements are not required by law when awarding funds to a 501(c)(3) public charity (other than Type III, non-functionally integrated supporting organizations) or a governmental entity, they are certainly desirable. For restricted grants, a written grant agreement is essential.
These documents should be suitably detailed, depending on the complexity of the grant being awarded. They should ensure both donor and recipient have discussed and reached a clear understanding of, and agreement to, the terms of the grant.
Such a document should include:
A clear statement of purpose. If your grant is unrestricted and may be used for any purpose within the entire funded organization, simply state that. You may also want it to be used for general operating costs, but only for a particular program of that organization. You may also restrict it further to a specific budget line of that program or designate purposes for which it may not be used. Ideally, you have already reached agreement with the grantee about such restrictions. In any case, be sure your language is clear to avoid misinterpretation.
The amount of your grant and how and when it will be paid. Whether you are paying in one installment or spreading your payments over a period of time, carefully consider the needs of your grantees and be aware their fiscal years may differ from yours. Some initiatives may require a larger first payment with smaller installments to follow.
A description of how—and on what timeline—the grantee will fulfill grant expectations. Again, this should be consistent with agreements already reached with the grantee regarding organization/program goals.
Your reporting requirements. These are best tailored to the size and complexity of the grant and may take different forms. Some donors prefer that all reports be submitted in writing; others are offering grantees the opportunity to report via a live or Zoom conversation.
The kind of involvement you would like to have in the funded program, if any. Scholarship donors, for example, may appreciate an opportunity to meet and speak with award recipients. Food bank donors may welcome an opportunity to serve meals or distribute items to those in need. Donors to youth sports programs may appreciate an invitation to a practice or game. Grantees should be free to decide whether such interaction might be disturbing to their clients and donors should be sensitive to such concerns.
The conditions under which your grant will be renewable (if appropriate), and the circumstances which will lead to termination. For multi-year grants, year-to-year metrics should be clear and reasonable and already familiar to the grantee.
A contingency plan that provides for a different—and specific—use of your funds in clearly defined situations.
A clause requiring the grantee to request permission from you or a designated representative before a grant is “repurposed.”
For grants which include naming rights, a clear description of what will carry the donor’s name, where and how the donor’s name will appear and the lifespan of the naming rights. In accepting naming rights, a grantee may wish to include a morals clause, so donors should consider how they might respond to that.
For foundation grants creating endowments, a reversion clause directing unused funds to be returned to the foundation if a grantee fails to adhere with restrictions in the original grant agreement.
For individuals creating endowments, a reversion clause providing the name of a contingent nonprofit beneficiary to whom unused funds will be transferred if a grantee fails to adhere with restrictions in the original grant agreement.
The signature of both parties on the agreement with a copy of the signed agreement returned to the donor.
As noted earlier, these elements may be modified for smaller grants and grants which are clearly one-time awards. Donors should consider developing multiple grant agreement templates to accommodate such differences. There may well be circumstances where a simple grant award letter will suffice. No matter what format is used, the desired result is the same – that all parties to a grant agreement share an understanding of the intended purpose of the grant and how that purpose is to be achieved.
If you have questions about grant agreements, please contact our Programs and Services Team.
