Rediscovering Fixed Amount Awards

(Illustration by iStock/ojogabonitoo)

For all the excitement in using innovative finance to help solve today’s most pressing social problems, an instrument in federal grantmaking has been hiding in plain sight for years: the fixed amount award. This is a simplified grant where payments are made upon achieving pre-negotiated milestones, instead of reimbursing costs, allowing the federal government to pay for outcomes, not inputs. But while fixed amount awards are the epitome of a pay-for-results grant instrument, they may not be widely used that way because their use requires a shift away from direct government oversight of grant spending.

The U.S. federal government provides close to $700 billion in grants each year. This presents an enormous opportunity to use grants in more creative ways. Traditional grantmaking generally involves the funder defining the problem and making grant payments for an activity’s costs, regardless of whether positive outcomes are achieved. By contrast, a fixed amount award defines the intended outcomes up front, then pays upon the grantee achieving results. While there is a clear destination, the grantee determines the best path to get there.

Fixed amount awards can be used as a direct pay-for-results grant, or as part of a broader impact investing structure. And because grants are less regulated than debt and equity investments, they can be designed in more creative ways to attract other sources of capital, such as: recoverable grants that act as a form of bridge funding for start-up social enterprises, first-loss protection for impact investment funds as either subordinated capital or as a “sidecar” facility, or as part of a pay-for-results structure to make outcome payments in a social or development impact “bond” structure. Valuable technical assistance can be provided through design- and preparation-stage grants for impact investments. But amidst the hype and marketing within the impact investing space, it ultimately boils down to how funds are moved. A federal agency can cut through all the noise by using a fixed amount award to simplify its participation in any innovative funding structure.

Results-Oriented Grantmaking as a Federal Priority

A key component of innovative finance is a focus on achieving outcomes, what the White House’s Office of Management and Budget (OMB) refers to as focusing on “performance over compliance.” OMB articulated this key principle when it overhauled the federal grant regulations in 2014. It formally established fixed amount awards as a federal grant instrument, as part of an ongoing push to deliver a “smarter, more innovative, and more accountable government for citizens.” This principle continues under the more recent President’s Management Agenda where the federal government encourages the use of innovative outcome-focused grant designs, including using pay-for-results approaches to make federal grant programs more evidence-focused. In line with this focus, fixed amount awards provide a specific level of funding without regard to actual costs incurred. Federal agencies may use fixed amount awards if adequate cost, historical, or unit pricing data is available to establish a reasonable estimate of actual cost to achieve the milestones (and an important update to the federal grant regulations taking effect on November 12, 2020, will reiterate that the project scope must have “measurable goals and objectives.”)

By tying payments to achieving milestones instead of reimbursing costs (outcomes over inputs), many administrative burdens in a traditional cost-reimbursement grant can be reduced: The federal agency does not have to verify whether the grantee has the proper accounting and reporting systems in place and the grantee can avoid indirect rate negotiations and incurred cost audits. Detailed regulations on the allowability of specific costs under federal grants also don’t apply to fixed amount awards, which saves both sides valuable time during the implementation and close-out of the award. The government has historically relied on these tools to ensure that grantees do not receive excess funding, but that concern fades once the government and grantee agree to milestones.

While fixed amount awards have been recognized in the federal grant regulations for almost six years, they are not likely being utilized to their full potential. For example, at the U.S. Agency for International Development (USAID), $11.5 billion was provided in grants in fiscal year 2019, yet fixed amount awards accounted for only $58 million of that amount and only 8.1 percent of all grant types used. Prior to 2014, some federal agencies used similar instruments that were a precursor to fixed amount awards including USAID (fixed obligation grants), Department of Housing and Urban Development (lump sum grants), Department of Energy (fixed obligation awards), and the Corporation for National Community Service (fixed-amount grants). These grants established a funding ceiling for specific, measurable activities like conferences, workshops, and studies. Thus, the limited use of fixed amount awards today may reflect a reluctance to cede government oversight of grant spending. While the goals of ensuring accountability and value for US taxpayers remain the same, there must be a change in how “success” is defined if grant funds are to be used more effectively. 

Bridging the Gap From Compliance to Performance

When it comes to innovation in government, working within the existing system is usually more effective than trying to create something new. This is particularly true in bureaucratic and risk-averse institutions where new ideas take time to implement. Breaking through the pay-for-results hype and implementing fixed amount awards will therefore require thoughtful planning and greater risk tolerance. Moreover, fixed amount awards may not be a good fit for the many types of social programs for which reliable metrics are unavailable or cannot be measured until years later. And the urgency of some problems require immediate action, regardless of whether milestones can be formulated or achieved.

Yet, because OMB already recognizes fixed amount awards as a grant mechanism, they should be more attractive to both federal grant makers and grantees alike. The widespread adoption of fixed amount awards may not happen overnight, but they should be used with far more frequency as federal grantmaking agencies increasingly look to adopt the “performance over compliance” principle.

To speed this evolution, we offer a few suggestions to both federal grantmaking agencies and potential grantees:

Take a Collaborative View, Starting From the Beginning

Fixed amount awards generally require more work up front, including negotiating the scope, pricing, and verification method for the milestones. But that up-front work will be offset by reduced administrative burdens later and a focus on driving results. Federal grantmaking agencies should not feel like they need to do all the up-front work on their own. In any funding notice, the federal agency should state its desire to focus more on outcomes than inputs, including clarifying key terms such as input, output, and outcome. And because it is ultimately up to the agency as to how it designs the grant, it could ask guiding questions to establish the basis for a fixed amount award without pre-determining the milestones. For a potential grantee, it could suggest using a fixed amount award as the specific grant instrument even if it is not expressly contemplated by the agency. Grantees can help the federal agency do a lot of thinking up front, greatly reducing the administrative burden.

Be Clear About the Milestones

A good fixed amount award should clearly address at least the following three questions:

1. How are the milestones defined? Milestones should strike a balance between being ambitious and realistic. They can be drafted as outputs, outcomes, or a mix of both. Instead of one all-or-nothing payment at the end, there can be a series of milestones within a single fixed amount award to provide some working capital for the grantee. To help cover initial operating costs, the first milestone could be a larger payment based on a simple deliverable. In this way, fixed amount awards do not have to be binary and can be designed on a continuum.

2. How are the milestones priced? Determining payments for hitting a milestone can be done if “adequate cost, historical, or unit pricing data is available to establish a fixed amount award based on a reasonable estimate of actual cost,” but agencies also have the flexibility to adopt procedures to consider other pricing metrics, such as anticipated cost savings and/or future economic value created as a result of the intervention in whole or part (called externalities). This includes providing underlying data or evidence, including through cost-benefit analyses, to support the pricing.

3. How are the milestones verified? Because milestones must be measurable, there should be a baseline and target within each milestone. While measuring outcomes may be difficult, simplifying is essential: reducing subjective determinations in whether a milestone is met will avoid potential conflicts later. For example, if an outcome related to increased literacy can be simply defined as an increase of 10 percent in reading test scores, then this can be objectively verified by comparing current scores as the baseline data with subsequent scores using the same test. It may not always be that straightforward, but good is better than perfect, and sometimes sufficient may be better than good.

Anticipate Change

Things change, particularly in the social sector. Requiring consistent checkpoints during the period of performance to adjust goals and pricing, as appropriate. The fixed amount award should also contemplate potential disagreement about these changes. Disputes are generally settled according to the policies and procedures of the federal agency, but if both parties can identify potential issues up front and talk through how they might be settled, then it could save time and legal expenses later. Such issues include whether partial payments would be allowed for incomplete milestones, how to calculate such partial payments, and how to account for unforeseen circumstances, such as COVID-19.

When in Doubt, Keep It Simple

Social impact is difficult to measure. But we need to give ourselves permission to simplify how funds move if we hope to scale what works. When defining milestones, it may be okay to use outputs as reasonable proxies for outcomes. When determining baselines or pricing, it may be okay to use data from prior grants for similar projects that had positive outcomes instead of requiring the latest, independent scientific study. And when verifying outcomes, it may be okay to forego costly, experimental designs like a randomized-control trial in place of something much simpler.

The framework already exists to bridge the gap between hype and reality and to advance federal grantmaking from a culture of compliance to a culture of performance. So when it comes to using fixed amount awards to pay-for-results, we are only limited by our imagination.

Read more stories by Samuel Jack & Jonathan Ng.