What Happens When the Federal Government Funds a Capital Project? A Guide for Accountants

When federal funds are used to acquire property, purchase equipment, or carry out capital projects, recipients must navigate a complex set of regulatory requirements. These requirements are intended to ensure transparency, accountability, and proper stewardship of public funds. Thus, understanding the technical and compliance aspects of these transactions is critical.

This guide is intended to introduce readers to key terms and definitions, as well as typical requirements found in the Uniform Guidance (defined below) and in agency-specific rules for federal awards. At the end, we’ve provided a Case Study to illustrate how these requirements might be applied in practice.

Please note that guidance on federal awards is codified and published within Title 2, Federal Financial Assistance, of the Code of Federal Regulations (CFR).

Key Terms and Definitions
• Capital Assets: Tangible assets such as land, buildings, equipment, and improvements that have a useful life beyond one year. In federal grant context, this typically includes real property (land and structures), and personal property (equipment and tangible items as well as software) purchased or improved with award funds.

• Federal Award: Financial assistance from a U.S. federal agency – such as a grant or cooperative agreement – to a non-federal entity to carry out a public purpose. (Contracts are governed by different rules, so our focus is on grants/cooperative agreements.)

• Federally-Owned Equipment: In some cases, equipment is furnished by the federal agency or acquired under an award with the agency retaining title (this is less common under grants). Such federally owned property remains government-owned, and recipients must annually inventory it and return or dispose of it as instructed after the award. Unless the award explicitly states equipment is federally owned, assume it falls under the recipient-titled rules.

• Ownership Interest: The ownership rights in a capital asset, including title (legal ownership) and any conditions or reversionary interests retained by the federal government. Essentially, this determines who “owns” the asset and under what terms.

• Uniform Guidance (2 CFR Part 200): The unified set of regulations titled Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards. Within these regulations are standard rules for managing property bought with federal funds across most agencies. Some federal agencies apply these rules through their own sections of the Code of Federal Regulations (CFR) or internal policy manuals, occasionally with minor modifications.

Typical Requirements

1. Prior Written Approval
In general, capital expenditures exceeding the lesser of $10,000 or the grantee’s capitalization threshold require prior written approval from the federal awarding agency or pass-through entity. This includes purchases of land, buildings, and general-purpose equipment as well as software. When capital assets are acquired with both federal and non-federal funds, ownership guidance considers the proportional investment from each source.
Tip: Review and update your client’s capitalization policy regularly to ensure alignment with federal thresholds. If your organization’s self-imposed threshold is below $10,000, they must get written approval based on that threshold.

2. Allowable Costs
To be allowable under a federal award, capital expenditures must meet the following criteria:
•  Necessary and reasonable for the performance of the award.
•  Fully justified in the approved budget and narrative.
•  Consistent with the terms and conditions of the award.
Tip: Recipients should ensure that documentation supports the necessity and allocability of the cost. Documentation is subject to audits or monitoring visits, so make sure it is accessible and understandable.

3. Procurement Standards
Grantees must follow federal procurement standards outlined in 2 CFR §§ 200.317–200.327 (2025), which emphasize competition, transparency, and fairness.
Procurement Methods:
• Micro-Purchases (< $10,000): No formal solicitation required, but price must be reasonable.
• Simplified Acquisition ($10,000–$250,000): Informal quotes acceptable, but documentation of competition is still required.
• Sealed Bids: Used for construction or large purchases; contract awarded to the lowest-priced responsible bidder whose bid meets all the material terms and conditions of the invitation.
• Competitive Proposals: Evaluation criteria must be pre-established; award may go to the most advantageous offer, not necessarily the lowest price.
• Non-Competitive (Sole Source): Permitted only under specific conditions (e.g., public emergency, inadequate competition). Must be justified and documented.
Tip: Ensure your client has a written procurement policy, conflict of interest policy, and procedures for proposal evaluation and bid rejection documentation. Recipients need to have appropriate policies and procedures in place before beginning the procurement process. Failure to have appropriate policies, or documentation showing that they are following their policies, can result in audit findings even if the procurement process is compliant.
 

4. Property Management
Once acquired, property must be tracked and safeguarded through a compliant property management system. Required elements include:
• Detailed property records (description, serial number, funding source including percentage of purchase price paid by the federal agency(s), acquisition date, cost, etc.)
• Inventory conducted at least every two years
• Maintenance and security protocols
• Procedures for investigating loss, damage, or theft
Tip: Ensure the Federal Award Identification Number (FAIN) is recorded for each asset, as well as the percentage of federal funding for the asset.
 

5. Use and Disposition
Federal rules require that property be used only for the authorized project as long as it is needed. When no longer needed:
• It may be repurposed for other federally funded projects with the original funder’s approval.
• Disposition must follow federal guidelines, which may include:
o Retention with no further obligation (this is common with funding by NIH and NSF when they support research grants)
o Sale with proceeds (or a portion) returned to the federal agency
o Return of the property to the federal agency
Tip: Always check the award agreement for specific retention periods and contact the funder before disposing of any federally-funded asset.
 

6. Conclusion
Capital projects funded by federal grants are subject to rigorous oversight. YPTC staff play a vital role in helping our clients ensure compliance with federal regulations, from initial approval through procurement, management, and final disposition. By maintaining strong internal controls and thorough documentation, grantees can avoid audit findings and ensure continued eligibility for federal funding.

 
Case Study: CDBG-Funded Roof Replacement for a Human Services Nonprofit

A human services nonprofit in rural Colorado operates a residential program for adults with brain injuries, with approximately 95% of residents enrolled in Medicaid. One of the organization’s housing facilities required a roof replacement, estimated at $60,000. The nonprofit had not budgeted for this capital expenditure in the current fiscal year.

1. Prior Written Approval

To address the funding gap, the nonprofit applied for a Community Development Block Grant (CDBG) through the local city government. CDBG is a federally funded program administered by the U.S. Department of Housing and Urban Development (HUD), typically passed through to states and municipalities. The City, in coordination with the State pass-through agency, established funding priorities and solicited applications from eligible community organizations.

The nonprofit submitted a grant application under the City’s goal to improve access to a “Suitable Living Environment” for low-income individuals. The application included a description of the population served, photographs of the deteriorating roof, and an inspection report from a licensed roofing contractor. The City approved the application, satisfying the prior written approval requirement for capital expenditures.

2. Allowable Costs
The grant application clearly demonstrated that the roof replacement was necessary and reasonable for the continued operation of the residential program. The inclusion of the contractor’s inspection report and the detailed narrative in the application helped substantiate the allowability of the cost under federal guidelines.

3. Procurement Standards
Although the total project cost of $60,000 fell below the federal threshold requiring sealed bids, the City required all CDBG-funded projects to follow a formal procurement process. The City’s purchasing department managed the procurement, leveraging its infrastructure and expertise in federally funded construction projects.
The City publicly advertised the opportunity and evaluated sealed bid proposals. This approach ensured compliance with 2 CFR §§ 200.317–200.327, even though the federal simplified acquisition threshold would have permitted a less formal process. The nonprofit benefited from the City’s procurement support, which is often available to subrecipients

4. Property Management
The CDBG grant was structured as a reimbursement-based award. The nonprofit paid the contractor upon completion of the work and submitted a reimbursement request to the City, including supporting documentation and a final narrative report.

Upon project completion, the nonprofit recorded the new roof as a distinct asset in its ERP system’s fixed asset module. The asset record included:
• Building identifier
• Acquisition date and cost
• Funding source (100% CDBG via the City)
• Assistance Listing Number (formerly CFDA)
• Depreciation schedule
The nonprofit’s property services department conducts annual inspections of fixed assets, documenting their condition and identifying future maintenance or capital replacement needs. The department also coordinates with the organization’s insurance broker to ensure adequate coverage.

5. Use and Disposition
Although the award letter did not specify a formal retention period, the nonprofit understands that any future sale or change in use of the property must be discussed with the funder. In such cases, the City may:
• Permit the nonprofit to retain the asset with no further obligation,
• Require sale and return of a portion of the proceeds, or
• Direct the return of the asset to the federal agency.
Note: In this case, the nonprofit has no intention of disposing of the property, but if they need to dispose of the building in the short-term, the city may require a portion of the sale proceeds to repay the roof. If the building is sold in the long-term, it is likely the City would let them retain the proceeds. Federal interests in property can be long-lived, exceeding typical document retention requirements. It is important to document the interest in a way that will survive future system and personnel changes.