The Legal Framework for Terminations of Federal Financial Assistance
Key Concepts and Terms of Art
The foundational concepts and terms of art specific to grant law have not changed in the flurry of activity and are somewhat analogous to federal procurement concepts governed by the FAR.
- The Uniform Guidance. Federal grants are governed by the Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, codified in the federal regulations at 2 C.F.R. Part 200. These are commonly referred to as the “Uniform Guidance.”
- Federal Financial Assistance, Grants, and Cooperative Agreements. Through the Federal Grant and Cooperative Agreement Act of 1977 (FGCAA), Congress differentiated between acquisition contracts on one hand and assistance through grants and cooperative agreements on the other. The primary difference between a grant and a cooperative agreement is the level of agency involvement. Generally, the agency is not involved in performance of a grant, while under a cooperative agreement, an agency retains “substantial involvement.” The Uniform Guidance implements at a broad regulatory level the concepts of the FGCAA and defines several forms of assistance that the federal government can provide. The two most common forms are grants and cooperative agreements. While the Uniform Guidance does not define “substantial involvement,” it typically involves approvals and monitoring of performance, but not to the level of prescriptive performance envisioned in a procurement contract. For example, substantial involvement could include approval of key personnel and/or subawardees.
- Recipients and subrecipients. The counterparty to the agency’s grant or cooperative agreement is known as the “recipient.” An awardee at a tier under the recipient is known as a “subrecipient” or “subawardee,” an entity functionally equivalent to a subcontractor under a procurement contract.
- Cost reimbursement. A common payment mode for grants and cooperative agreements is cost reimbursement, where recipients incur costs, invoice under their award, and later receive payment from the federal agency. As noted below, cost principles control how a recipient can expend funds, and when a recipient fails to follow the cost principles, those costs will be disallowed. A disallowed (or unallowable) cost is one that the recipient may incur, but the federal government will not reimburse.
- Termination. The Uniform Guidance defines “termination” as the action an agency takes to discontinue an award, “in whole or in part, at any time before the planned end date of the period of performance. Termination does not include discontinuing a Federal award due to a lack of available funds.”
Types of Terminations Provided by the Uniform Guidance
Falling under the section titled “Remedies for Noncompliance,” the Uniform Guidance provides four bases to terminate a grant or cooperative agreement.
First, an agency can terminate an award if a recipient “fails to comply with the terms and conditions of the Federal award.” This for-cause termination is akin to a termination for default, or “T4D,” under a procurement contract. Terminations under this provision require some material failure in performance of the award that the recipient cannot cure. When an agency terminates an award under this provision, it must report the termination in SAM.gov and use the Contractor Performance Assessment Reporting System (CPARS) to enter information on the recipient’s poor performance.
The second kind of termination can arise by “consent of the recipient or subrecipient, in which case the two parties must agree upon the termination conditions.” This is the mutual termination provision, where the parties agree not to complete the award. For example, perhaps circumstances change so that a factual assumption held by both the agency and the recipient fails to hold and continuing the award does not make sense anymore. Rather than press onward, the parties can cut their losses and agree to end the award. A mutual termination also can be used if there is some dispute over the award, but rather than continue through difficult circumstances and the disputes process, the parties can negotiate an end to the award.
The third kind of termination can be by the recipient. The recipient can elect to end the award and send written notice to the agency of a partial or total termination. In the case of a recipient’s partial termination, if the agency determines that the remaining work is not consistent with the overall purpose of the federal award, the agency can elect to terminate the award in whole. This provision essentially gives the agency a veto over a recipient-initiated partial termination.
Finally, the Uniform Guidance has a provision somewhat analogous to a termination for convenience, or “T4C,” under federal procurement law. The framework provides that an agency, “pursuant to the terms and conditions of the Federal award, including, to the extent authorized by law,” can terminate an award “if an award no longer effectuates the program goals or agency priorities.” This provision provides the agency with significant flexibility depending on what its program goals and priorities are, particularly as we have seen recently, when there has been a change in administration. Importantly, as the regulation ties the termination power to the “terms and conditions” of the award, there is no blanket power to terminate an award for the government’s convenience, as is the case with a procurement contract.
When the Office of Management and Budget (OMB) first promulgated the Uniform Guidance in 2014, it did not initially create the government’s broad power to terminate an award for a change in programmatic purposes. Upon revisions issued in August 2020, OMB added the termination of an award for no longer effectuating “program goals or agency priorities.” In the Notice of Proposed Rulemaking, OMB stated that “Federal awarding agencies must clearly articulate the conditions under which a Federal award may be terminated in their applicable regulations and in the terms and conditions of Federal awards.” Additionally, OMB focused on evidence and feasibility, explaining that the intent of this termination basis was
to ensure that Federal awarding agencies prioritize ongoing support to Federal awards that meet program goals. For instance, following the issuance of a Federal award, if additional evidence reveals that a specific award objective is ineffective at achieving program goals, it may be in the government’s interest to terminate the Federal award. Further, additional evidence may cause the Federal awarding agency to significantly question the feasibility of the intended objective of the award, such that it may be in the interest of the government to terminate the Federal award.
In promulgating the final rule in August 2020, OMB brushed off concerns that the proposed language would provide agencies “too much leverage to arbitrarily terminate awards without sufficient cause.” OMB responded that “agencies are not able to terminate grants arbitrarily,” but did not elaborate further. Apparently, OMB thought that requiring agencies to explain their actions in conjunction with their own regulations and award terms and conditions would be sufficient to explain a decision to invoke a termination to discontinue an award that did not accomplish the program goals or agency priorities. This background contextualizes the wave of terminated awards at the beginning of the second Trump administration, with the justification commonly being proffered for ending such awards prematurely is that the award “does not effectuate agency priorities.”
Agency Implementation of Termination Provisions
Agencies implement the Uniform Guidance by including the concepts of the regulations, or direct citations to them, in the agency’s own grant and cooperative agreement standard terms and conditions. For example, NASA, the Centers for Medicare & Medicaid Services, and the Department of Energy have such terms that mirror the four termination bases in their publicly available template agreements.
Other agencies have added additional bases for termination, as they are permitted to do under the Uniform Guidance. These additional bases increase the flexibility and discretion of agencies to terminate awards. For example, the National Institutes of Health (NIH) can terminate an award “when necessary, such as to protect the public health and welfare from the effects of a serious deficiency.” These terms and conditions do not indicate what would constitute a “serious deficiency,” leaving that to a fact-specific agency determination. Similarly, the US Agency for International Development (USAID) added a termination provision in its own grant regulations. USAID provided that termination can occur when “such assistance would not be in the national interest of the United States or would be in violation of an applicable law.” Again, what constitutes the “national interest” is determined by USAID. Although this provision was not generally cited in the thousands of termination notices sent by USAID in February 2025, the template letters sent by USAID repeated that the termination was being made because the award was no longer in the “national interest.”
Other Rules Regarding Terminations
The Uniform Guidance also provides several other termination-related rules for the orderly unwinding of awards. Primary among these rules are the due process considerations where the agency must provide written notice of a termination and the recipient has an opportunity to object and be heard. The notice must provide the reasons for the termination, the effective date, and the scope of action (whole or partial). The Uniform Guidance also requires agencies to maintain written procedures for processing objections, hearings, and appeals. Typically, objections are addressed by the cognizant Agreement Officer (AO) and appeals are handled at a level above the AO within the agency.
Additional rules include the obligation of the recipient and subrecipient to complete the close-out process, where the agency determines that all required work and reporting have been completed, and a directive that costs incurred after the suspension of an award are not allowable, unless they were bona fide financial obligations before the effective date of the termination.
Responding to a Termination Notice
The termination of a grant or a cooperative agreement is a decision that can be objected to and appealed under agency procedures for a further level of review, generating a dispute between the agency and the recipient. These disputes, however, differ in some important ways from contract disputes. In a procurement acquisition, contractors provide their government customers with goods or services according to terms and conditions. Grants and cooperative agreements do not involve goods or services being provided to the government; they involve recipients receiving federal funding in exchange for performance to accomplish a public purpose in accordance with the agreed-upon terms and conditions. Thus, the relationship between the agency and the recipient is more like two partners working together toward a common goal. In such a relationship, the recipient agrees to manage the program and spend federal dollars, and the agency generally oversees performance. Scrutiny of a recipient’s performance can result in a variety of outcomes, such as increased oversight or reporting, cost disallowances (typically from audits), and termination.
Accordingly, a recipient receiving a termination notice will have to assess whether to appeal at all. This bears emphasis because of the relationship between the agency and recipient, as opposed to procurement’s relationship of buyer-and-seller of goods and services. If some government contractors hesitate to exercise contractual rights fearing damage to their relationship with the customer, the anxiety a recipient might feel can be even higher, as many organizations depend on federal funding. Given this different context, where the relationship of the agency is a funder and the recipient is a partner to accomplish a government-sponsored program, a recipient may refrain from contesting agency action, except in the instances that carry the most disruption to the recipient, such as a termination.
For practical purposes, a response to a termination notice would likely only arise when challenging (1) a termination for cause or (2) a termination for when an award no longer effectuates program goals or agency priorities. (A recipient would not appeal a termination it initiated or one it agreed to with the agency.) Recipients appealing such terminations can seek the following remedies:
- Set aside the decision;
- Convert a for-cause termination into a “convenience”-type termination; or
- Reverse agency determinations disallowing associated costs.
By pushing back on the agency’s decision, several outcomes can occur, such as reversing disallowed costs or having the decision returned to the AO for further consideration. Convincing an agency to convert a for-cause termination to one that does not fault the recipient, instead concluding that a program no longer effectuates agency priorities, or sets aside the default, is a much steeper challenge. Recipients have to meet the standard of review employed by the agency, which can vary depending on whether the issue involves questions of fact or law, such as being clearly erroneous or arbitrary and capricious. If the agency denies the appeal, a recipient can still challenge that decision by a civil action in federal district court, an even steeper challenge than appealing inside the agency. Nonetheless, as discussed further below, there are some circumstances that warrant such an approach.
Practical Guidance in Addressing Terminations of Federal Financial Assistance
Upon receiving a termination notice, recipients should be prepared to analyze it and take action that protects their interests to the full extent afforded by the governing regulations and terms and conditions of their award. There are several issues that recipients and their counsel should consider.
Exploring and Challenging the Basis for Termination
Recipients should confirm the agency’s basis for the termination. In many instances, the agency’s action should not come as a surprise to the recipient because performance problems would likely have been discussed between the agency and the recipient, most likely leading to attempts to address the concerns and/or responses to cure notices. If the concerns cannot be addressed to the agency’s satisfaction, termination can occur. Section 200.208 of the Uniform Guidance provides that agencies can impose “specific conditions” upon recipients to address performance concerns. These conditions can include withholding authority to proceed to the next phase until receipt of evidence of acceptable performance, requiring additional or more detailed financial reports, or requiring additional project monitoring.
Recipients should take a hard look at a termination for failure to comply with terms and conditions of their award, i.e., a “for cause” or default termination. As noted above, such terminations are reported in CPARS, allowing agencies across the federal government to see the termination when reviewing a recipient’s past performance in consideration with making a new award to the recipient. Such CPARS reporting can impact a recipient’s ability to win future awards. As such, recipients should take a termination for failure to comply with the award terms and conditions very seriously and explore all avenues for an administrative appeal. Potential relief for challenging these kinds of terminations—short of total victory of an outright reversal—would be to convert the termination into one that does not require the reporting of derogatory information of the recipient in CPARS. Taking a cue from procurement contracts where terminations for default can be converted into terminations for convenience, an acceptable resolution may be effectuated by recharacterizing the termination as mutually agreed between the parties or one that reflects a change in the agency’s priorities.
Notably, some recipients may appeal terminations based on the stated rationale that an award no longer effectuates an agency’s program or priorities. While agencies may have a broad power to terminate awards for shifting priorities, there should be a documented and reasonable basis for such action. Given the recent high volume of unilateral terminations invoking this basis, some recipients may be able to test an agency’s reasoning as there might not be any contemporaneous documentation articulating the need for mass terminations of awards. An appeal on this basis will probably not be able to reverse an agency’s ultimate decision to terminate an award, but the appeal could serve as a basis to educate agency decision-making or narrow the scope of the termination. Also, as noted below, exercising appeal rights at the agency level may be necessary to exhaust administrative remedies before commencing a formal lawsuit.
Cost Allowability
Another major concern related to terminations is the allowability of any costs that the recipient might be entitled to recover as a result of the termination. When an agency terminates an award, the recipient in most instances can still seek reimbursement for its incurred costs to date. Recipients therefore should assemble fulsome documentation to support a claim for recoverable costs while winding up the award. Typical categories for recipients that result in an agency to disallow costs arise from noncompliance with cost principles, such as those located at 2 C.F.R. Part 200, Subpart E, Cost Principles; ineligible amounts claimed as cost share by the recipient; and the failure to follow required procedures for procurements made under the grant or cooperative agreement. On this last point, as the federal funding agencies usually lack privity of contract with contractors and subrecipients under assistance awards, the review of costs incurred under a contract or subaward by a contractor will be limited to the extent they are part of the recipient’s overall claim to the agency. Prime recipients should be mindful in managing the contractors, subcontractors, and subrecipients appropriately when winding down an award in the wake of a termination so as to minimize the potential for disputes with these parties that are not part of the overarching termination proposal or settlement with the agency.
A particularly fraught area of cost allowability relates to the payment of taxes, including taxes that may be subject to an international treaty. Recipients seeking to claim amounts paid in tax should closely study the legal regimes under which they are operating and document decisions by cognizant AOs upon which they relied prior to award termination. Such documentation will often be key in obtaining reimbursement for such tax payments.
Adequate Documentation
Related to cost allowability and exploring the stated reason for the termination, recipients must be prepared to present thorough documentation to enable them to maximize their cost recovery. A recipient must have a financial management system “sufficient to permit the preparation of reports required by general and program-specific terms and conditions … [and able to] track[ ] funds to a level of expenditures adequate to establish that such funds have been used according to the Federal statutes, regulations, and the terms and conditions of the Federal award.” Agencies typically make this regulatory requirement a part of their standard terms and conditions, underscoring the need for recipients to have accounting records and supporting documentation not only to show costs incurred under an award, but also to verify the receipt of goods and services acquired under the award and the costs of the program supplied from other sources as part of the recipient’s cost share.
Generally, there are no agency-specific rules as to the particular documents that will be considered adequate to support a cost. Widely applied rubrics, such as the generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS), provide a set of rules that encompass the details, complexities, and legalities of business and corporate accounting for US organizations and non-US organizations, respectively. Nevertheless, recipients should be prepared for the reality that an agency’s review of the supporting documents is fact-specific, and the agency’s ultimate approval must be consistent with the requirements laid out in the agreement.
Reviewing Agency Action
In addition to the foregoing substantive issues regarding a termination of an award, recipients should be cognizant of the standard of review as they consider challenging the reasoning of a final decision and submitting evidence to demonstrate the allowability of costs. Just as in agency actions regarding procurement contracts, if attempting to persuade the agency to change its mind, the recipient will have the burden to establish that the decision was arbitrary and capricious, unreasonable, or not supported by the totality of the evidence. There are several permutations of this standard drawn from the developed decisional law reviewing agency action, including:
- the asserted or necessary factual premises of the termination do not withstand scrutiny;
- the termination does not provide an adequate explanation or rests upon reasoning that is seriously flawed;
- the termination was made without legitimate reason and adequate explanation, inconsistent with prior agency policies or precedents;
- in rendering the termination, the agency failed to consider relevant arguments made by the recipient; and
- the justification for the termination reaches a conclusion that contradicts the underlying record.
Importantly, recipients should be aware that many of these flaws are procedural, meaning that an agency could correct the flaw by re-issuing its termination decision. Recipients should carefully consider the costs of overturning a termination because a victory may be relatively short-lived.
Developing Caselaw on Challenging Terminations of Grants and Cooperative Agreements
At the time of this article’s composition, there is a surge of grant and cooperative agreement termination litigation moving through the courts as recipients attempt to reverse decisions by agencies to end awards where the government has stated that the project no longer advances agency priorities. These cases will further develop the caselaw regarding challenges to terminations, particularly on issues addressing (1) in which forum such challenges shall be litigated and (2) constitutional questions regarding the separation of powers, where the legislative branch appropriates federal funds through statutes, and to the extent the executive branch must spend those funds.
For context, recipients have litigated challenges to terminations in federal district courts claiming subject matter jurisdiction under the Administrative Procedure Act (APA) to overturn an agency’s decision as “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” However, if the lawsuit focuses on a monetary claim, such as a disallowance of costs or demand that the government pay funds in accordance with award terms, the lawsuit is susceptible to being confined to the US Court of Federal Claims (COFC) under Tucker Act jurisdiction.
The foundational case for these types of challenges is a decades-old Supreme Court case, Bowen v. Massachusetts. In Bowen, the Department of Health and Human Services (HHS) disallowed Medicaid costs claimed by the Commonwealth of Massachusetts, and the state responded by seeking to overturn the decision in federal district court. The federal government questioned whether a federal district court could have jurisdiction under the APA and whether the disallowance—essentially amounting to a claim for damages—could be litigated in the US district court and not at the COFC’s predecessor, the Court of Claims, as a breach of contract claim. The Supreme Court concluded that the district court had jurisdiction under the APA. The court construed Massachusetts’ claim as not one for “money damages” but for relief to force HHS to make a payment owed under the grant program. The court rebuffed the government’s argument that the Court of Claims should have jurisdiction, concluding that the Court of Claims could not provide prospective equitable relief relating to Massachusetts’ and the government’s ongoing relationship.
Since Bowen, there have been numerous decisions ruling on subsequent disputes over grants and cooperative agreements involving claims involving disbursement of funds framed as APA claims. These types of controversies have reached a critical point this year in cases such as Conference of Catholic Bishops and AIDS Vaccine Advocacy Coalition. In Conference of Catholic Bishops, a judge of the DC district court ruled that a recipient’s demand for the government to resume two cooperative agreements sounded in contract law, rather than equity under the APA, such that the district court lacked jurisdiction. In short, the recipient had entered into two cooperative agreements with the State Department to help resettle refugees. Upon the transition to the new Trump administration, the State Department suspended the awards pending a review as to whether the agreements aligned with the new administration’s priorities. The recipient brought suit seeking a temporary restraining order (TRO) and an injunction to compel the government to continue the refugee program, as the recipient had millions of dollars in requested reimbursements already pending. In response, the State Department terminated the awards under 2 C.F.R. § 200.340(a)(4) as they no longer effectuated the agency’s priorities. The court first denied the recipient’s request for a TRO and then, in its opinion denying the motion for an injunction, ruled that the court lacked jurisdiction, observing that the case properly belonged in the COFC. “Stripped of its equitable flair, the requested relief seeks one thing: The Conference wants the Court to order the Government to stop withholding the money due under the Cooperative Agreements.”
In contrast, another judge of the DC district court granted a motion for a preliminary injunction in AIDS Vaccine Advocacy Coalition, holding that the court did have jurisdiction because the claims were not, in essence, contract disputes. The plaintiffs in AIDS Vaccine Advocacy Coalition—contractors and recipients—initially sought to restore appropriated funding that had been frozen soon after the start of the second Trump administration. While the court issued a temporary restraining order on February 13, 2025, regarding the nonpayment or freeze, the government conducted a review of awards in the following weeks and ended up terminating thousands of awards. So, the plaintiffs added challenges to the actual terminations in seeking an injunction.
Granting in part the plaintiffs’ request for an injunction, the court ruled that it had jurisdiction, rejecting the government’s argument that the heart of the dispute was a contract dispute: “Indeed, it would be quite extraordinary to consider Plaintiffs’ claims to sound in breach of contract when they do not at all depend on whether the terms of particular awards were breached—they instead challenge whether the agency action here was unlawful, irrespective of any breach.” Instead, the court looked to the APA and other statutes, including the Impoundment Control Act of 1974, the Anti-Deficiency Act, and the Further Consolidated Appropriations Act of 2024, and held that the plaintiffs were likely to succeed on their claims because it appeared that the government acted arbitrarily and capriciously in freezing broad swaths of foreign aid without consideration of the massive reliance interests at stake. Importantly, the court did not find that the plaintiffs would prevail in setting aside terminations that occurred in a subsequent review of awards after February 13, 2025.
Closing Thoughts as We Muddle Forward
The differing outcomes from the two foreign aid cases at the district court level show that jurisdiction over terminations of grants and cooperative agreements is unsettled and subject to more developments. In this way, recipients face greater uncertainty than contractors, who at least know that under a standard CDA claim, they can reliably go to the US Court of Federal Claims or a board of contract appeals to get some level of objective judicial review. Notwithstanding the current jurisdictional uncertainty for grant recipients, going to court consumes a significant amount of time and resources, even after receiving a disappointing result at the administrative or agency level. Moreover, federal financial assistance programs vary by agency, increasing the likelihood that a court could defer to an agency’s decision, unless the action is glaringly out of step with normal processes and reliance interests.
As with many things in the new Trump administration, this is an evolving story. But recipients of grants and cooperative agreements should know that there are options available when facing a termination. But the risk of watching a funding stream evaporate might be even more untenable than exercising one’s rights under an award, even if meaningful relief remains to be seen. Contractors should also take note as the challenged decisions and court rulings highlight flawed or cursory agency decision-making. While such decision-making in these cases has been confined to grants and cooperative agreements, analogous processes may spill over into procurement in the near future.
