Federal Grant Closeout: Best Practices for State and Local Governments

Executive Overview

Federal grant closeout is one of the most frequently audited compliance areas in Single Audits and compliance examinations of state and local governments. The Office of Management and Budget (OMB) Uniform Guidance (2 CFR 200) prescribes specific closeout timelines, documentation requirements, and financial reconciliation steps that governments must follow to achieve a clean exit from federal funding relationships.

Poor grant closeout practices result in dozens of audit findings annually, ranging from untimely submission of closeout reports to incorrect disposal of equipment purchased with federal funds. Beyond audit risk, inadequate closeout invites suspension of future federal funding, debarment issues, and grant recovery actions by federal agencies.

This guide covers the complete closeout lifecycle: the 120-day rule, Final Federal Financial Report (FFR/SF-425) preparation, cost allocation methodologies, equipment and property disposition requirements, subrecipient closeout verification, and the critical 3-year record retention requirement. We'll also examine the most common audit findings from Single Audits and provide a step-by-step checklist to minimize risk.

The Legal Framework: 2 CFR 200 Subpart E

Closeout Requirements: 2 CFR 200.344

Federal closeout requirements apply to all non-Federal entities (states, localities, Indian tribes, nonprofits) that receive federal awards. The primary regulation is 2 CFR 200.344, which mandates that:

Closeout must be initiated by the Federal agency or, if the agency does not initiate, the non-Federal entity must notify the federal agency and request closeout procedures.
The non-Federal entity must submit all required reports within a specified timeframe.
Final payment is made only after the Federal agency determines that all applicable requirements have been met.

The 120-Day Timeline

The critical deadline is 120 days after the period of performance ends. Within this window, the non-Federal entity must:

Submit the Final Federal Financial Report (SF-425, Form FFR)
Resolve all outstanding audit questions
Submit final invoices (if applicable)
Certify compliance with grant conditions
Provide status of all open commitments

Failure to meet the 120-day deadline triggers automatic administrative consequences:

Federal agency may decline to reimburse final expenditures
Interest may accrue on overpayments owed by the grantee
Penalties may be assessed under 18 U.S.C. § 287 (false claims)

The 3-Year Record Retention Rule: 2 CFR 200.334

After closeout, the non-Federal entity must retain all accounting records, supporting documents, and evidence of compliance for a minimum of three years from the date of submission of the final report, or as specified by the specific program statute.

What must be retained:

Grant agreements and amendments
Financial reports and invoices
Time and effort documentation (for labor-intensive grants)
Procurement records (bids, contracts, justifications for sole-source procurements)
Equipment disposition documentation
Personnel records (if staff were charged to the grant)
Travel records (if applicable)
Audit and monitoring reports
Correspondence with the federal agency

Storage and accessibility: Records must be stored in a manner that permits ready retrieval. Digital records are acceptable if:

The system provides audit trails (showing who accessed, when, and from where)
Records are backed up and secured against loss
The system is accessible for federal monitoring visits

Final Federal Financial Report (FFR) Preparation: SF-425

The SF-425 (or agency-specific FFR form) is the lynchpin of grant closeout. This report reconciles all federal funds drawn and expended against approved budgets and established allowable costs.

Key Sections of the SF-425

Part I: Identification and Period

Field	Requirement
Federal Agency	Name of funding agency (e.g., DOT, HUD, EPA)
Program Title	Exact grant program name from the Notice of Award
Grant/Cooperative Agreement Number	The CFDA number and unique grant identifier
Reporting Period	Start date to end date of final period
Submission Type	Mark "Final" for closeout reporting
Recipient Organization	Legal name and EIN of grantee

Part II: Financial Summary

This is the critical reconciliation section. The FFR must tie federal expenditures to:

Federal funds obligated (from the Notice of Award)
Federal funds drawn to date (cumulative cash reimbursement)
Federal expenditures to date (cumulative matching costs and indirect allocations)
Unliquidated obligations (commitments made but not yet paid)

Example: Transit Capital Grant Closeout

A local transit agency received a Federal Transit Administration (FTA) Section 5339 Capital grant for $5.2 million over a 4-year performance period (July 1, 2021 – June 30, 2025). At closeout:

Line Item	Amount
Federal Funds Obligated	$5,200,000
Less: Federal Funds Drawn (Years 1–4)	($5,180,000)
Remaining Drawdown Available	$20,000
Federal Expenditures (Invoiced)	$5,180,000
Less: Estimated Additional Costs (June 2025)	($15,000)
Estimated Final Federal Expenditures	$5,165,000
Unliquidated Obligations (Pending Invoices)	$35,000

In this example, the agency drew $5.18M, spent $5.165M, and has $35K in pending obligations (orders placed but not yet invoiced). The remaining $20K obligation + $35K unliquidated = $55K shortfall against the original $5.2M award. This must be explained (bid savings, project scope reduction, etc.).

Part III: Recipient Certifications

The grantee's authorized official must certify:

The information in the FFR is true, accurate, and complete
All federal funds were used for allowable purposes consistent with the grant agreement
Matching funds requirements have been met (if applicable)
Indirect costs were calculated in accordance with the approved cost allocation plan (or negotiated indirect cost rate agreement)
All known liabilities are disclosed (pending litigation, audit questions, disallowed costs under review)

Common Errors in FFR Preparation

Error 1: Mismatched Expenditures and Drawdowns If the FFR shows federal expenditures of $4.2M but federal funds drawn of $4.5M, the $300K variance is unexplained. This triggers a federal agency follow-up requiring the grantee to either:

Document additional costs and draw down the difference, or
Remit the overpayment

Error 2: Failure to Disclose Unliquidated Obligations A grantee closes out without mentioning $250K in construction contracts signed but not yet invoiced. When the invoices arrive 6 months later, the federal agency must determine whether to allow reimbursement post-closeout. This becomes a compliance violation.

Best Practice: Always list all known unliquidated obligations on the FFR, with explanations and estimated invoicing dates.

Error 3: Incorrect Indirect Cost Allocation If the grantee's approved indirect cost rate is 25% and indirect costs are not properly allocated to the grant, the FFR will show artificially low federal expenditures. Auditors will recalculate and demand restatement.

Equipment Disposition: 2 CFR 200.313 and 200.314

Federal awards often fund the purchase of equipment (vehicles, IT systems, lab equipment, etc.). GASB defines "equipment" as items with unit cost of $5,000 or more and a useful life of more than one year. Federal guidelines may differ by program; always verify program-specific thresholds in the Notice of Award.

Equipment Ownership and Title

During the Period of Performance: The non-Federal entity has title to equipment purchased with federal funds, BUT:

Equipment must be used for the purposes authorized in the grant
Equipment cannot be diverted to non-grant uses without federal approval
The federal agency retains a security interest in the equipment

At Closeout: The non-Federal entity must provide the federal agency with:

Inventory of all equipment purchased with federal funds
Current condition assessment (operational, fully depreciated, obsolete, etc.)
Photograph or serial number documentation
Location (still in use, transferred, disposed, etc.)

Equipment Disposition Options: 2 CFR 200.313

When the period of performance ends, equipment purchased with federal funds has three disposition paths:

Option 1: Continued Use by the Non-Federal Entity If the equipment is still functional and needed, the grantee may retain and use the equipment for its original purpose, subject to:

Annual inventory certification
Continued capitalization and depreciation per GAAP
The federal agency retains an interest until the equipment is fully depreciated

Option 2: Transfer to Another Governmental Unit or Nonprofit Equipment may be transferred to:

Another governmental entity
A nonprofit organization
A school district or university

Requirements for Transfer:

The receiving entity must be a non-Federal entity capable of managing federal property
The grantee must notify the federal agency
The receiving entity assumes the obligation to maintain records and use the equipment for authorized purposes
The receiving entity is responsible for equipment disposition when useful life ends

Option 3: Return to the Federal Government or Sale For equipment no longer needed or obsolete:

The federal agency may request return of the equipment
More commonly, the non-Federal entity may sell the equipment and remit net proceeds to the federal government (as a credit against the grant or for return to the federal agency)

Calculation of Proceeds Owed to Federal Government:

Federal Interest = (Federal Contribution / Total Equipment Cost) × (Sale Proceeds − Sales Costs)

Example:

A Water Authority purchased a pump system for $80,000, funded 80% by a EPA Water Infrastructure Finance and Innovation Act (WIFIA) grant ($64,000) and 20% by local funds ($16,000). Ten years later, after the grant closed out, the equipment was obsolete and sold for $5,000 (net of sales costs).

Federal Interest = ($64,000 / $80,000) × $5,000 = $4,000 (remitted to EPA) Local Interest = ($16,000 / $80,000) × $5,000 = $1,000 (retained by authority)

Equipment Disposition Compliance Checklist

Identify all equipment purchased with federal funds (unit cost > federal threshold, useful life > 1 year)
Create an equipment inventory by grant program and funding year
Assess current condition (operational, underutilized, obsolete)
Document ongoing use or determine disposition method
If transferring: obtain written agreement from receiving entity and notify federal agency
If selling: obtain fair market appraisal, conduct open-bid process, document proceeds
Calculate federal interest in sale proceeds
Remit federal share of proceeds or document credit against grant
Retain photographs and disposition documentation for 3-year record retention period

Property Disposition Requirements

Real property (land and buildings) purchased or improved with federal funds has stricter disposition rules than equipment.

Federal Interest in Real Property

Real property acquired or improved with federal funds remains subject to federal interest until:

The project no longer serves the purpose for which it was acquired (federal interest period, typically 20 years for some programs)
The grantee has disposed of the property

Example: A City received a FTA grant to construct a transit station building. The federal interest extends for 20 years post-completion. If the City wants to sell the station before 20 years expire, it must:

Offer the property back to the federal agency first, or
Sell and remit the federal share of proceeds
Document the transaction for federal approval

Property Disposition Process: 2 CFR 200.311

Request federal agency approval before disposing of real property with a remaining federal interest
Obtain independent appraisal to establish fair market value
Conduct open-market sale (typically competitive bid or listing with commercial broker)
Calculate federal interest: Same formula as equipment (Federal Contribution % × Net Proceeds)
Remit federal share or use proceeds to acquire replacement property of similar value and purpose

Subrecipient Closeout Verification

If the grantee passed federal funds to subrecipients (nonprofit organizations, other government agencies, universities), the grantee is responsible for verifying that subrecipients have properly closed out.

Subrecipient Closeout Requirements: 2 CFR 200.331–332

Grantees must:

Verify subrecipient closeout within 120 days of the grantee's closeout deadline
- Request final financial reports from subrecipients
- Verify matching fund contributions
- Confirm equipment disposition
- Review compliance certifications
Obtain subrecipient's audit report (if subrecipient is subject to audit under 2 CFR 200.514)
- Subrecipient audits must be submitted within 30 days of audit completion
- Grantee must review for audit findings or questioned costs
- If questioned costs are identified, grantee initiates collection process
Resolve questioned costs
- Grantee must pursue collection of disallowed costs from subrecipients
- Documentation of collection attempts must be retained for federal review
Certify subrecipient closeout to the federal agency
- Grantee includes subrecipient closeout status in its own closeout package

Common Subrecipient Closeout Issues

Issue 1: Delayed Subrecipient Reporting Subrecipient does not submit final financial report within 120 days, delaying the grantee's closeout. Grantee must follow up persistently and may need to:

Escalate to subrecipient's executive director or finance officer
Implement penalty (withhold final payment) if authorized by the subaward agreement
Escalate to federal agency if subrecipient is unresponsive

Issue 2: Questioned Costs Identified in Subrecipient Audit Subrecipient's auditor identified $45K in unallowable costs (travel marked as grant-funded when it should have been charged to a different program). Grantee must:

Request written response from subrecipient (explaining the questioned costs)
Make determination of allowability (question may be valid or incorrect audit finding)
Demand repayment if costs are indeed disallowed
Report the status in grantee's own closeout package

Issue 3: Equipment Not Inventoried by Subrecipient Subrecipient cannot locate equipment purchased with federal funds. Grantee must:

Investigate whether equipment was transferred, sold, or stolen
Determine federal interest and value of missing equipment
Pursue restitution from subrecipient
Report missing equipment to federal agency and document follow-up

Common Audit Findings Related to Closeout

Based on Single Audit reports across hundreds of governments, these audit findings appear most frequently:

Finding 1: Late Submission of Final Report (2 CFR 200.344)

Description: Grantee did not submit the final Federal Financial Report until 150+ days after the period of performance ended.

Cause:

Lack of administrative tracking of closeout deadlines
Delayed resolution of expenditure questions from the federal program officer
System constraints in reconciling financial data

Auditor Adjustment:

Questioned costs may be disallowed
Interest penalties may apply under 18 U.S.C. § 287

Prevention:

Calendar closeout deadlines when the Notice of Award is issued
Assign closeout responsibility to a specific individual
Begin final reconciliation 30 days before the deadline

Finding 2: Unreconciled Federal Drawdowns and Expenditures (2 CFR 200.302)

Description: The grantee drew $2.8M in federal funds but could only document $2.65M in expenditures. The $150K variance was unexplained.

Cause:

Inadequate accounting controls
Failure to match drawdown vouchers to expenditure documentation
Unresolved questions about whether certain costs are allowable

Auditor Adjustment:

Entire amount questioned until reconciled
Demand for reimbursement to federal government if overpayment is confirmed

Prevention:

Implement monthly reconciliation of federal drawdowns to accounting system
Maintain a "drawdown register" that ties each reimbursement voucher to supporting expenses
Investigate discrepancies immediately (don't wait until closeout)

Finding 3: Failure to Return Equipment Inventory (2 CFR 200.313)

Description: Grantee did not provide the federal agency with an inventory of equipment purchased with federal funds at closeout.

Cause:

Lack of equipment tracking system
Belief that federal agencies don't enforce equipment disposition requirements
Personnel transitions resulting in loss of documentation

Auditor Adjustment:

Finding for non-compliance
May result in requested restitution if equipment cannot be located

Prevention:

Maintain a detailed equipment schedule at the time of purchase (include unit cost, acquisition date, location, serial number)
Update the schedule annually
At closeout, conduct a physical inventory count
Photograph high-value items
Submit equipment disposition documentation to federal agency

Finding 4: Inadequate Indirect Cost Allocation (2 CFR 200.414)

Description: Grantee's grant was charged only $120K in indirect costs, but the approved NICRA (Negotiated Indirect Cost Rate Agreement) supports $180K in allocations.

Cause:

Finance staff unaware of the approved indirect cost rate
Failure to allocate indirect costs to all grant programs (allocated only to certain funds)
Incorrect cost pool calculation

Auditor Adjustment:

Reclassify $60K of direct costs to indirect
Demand reimbursement from grantee or credit against future awards

Prevention:

Distribute NICRA to all finance staff and supervisors
Implement a checklist of NICRA requirements (rate, cost pool composition, allowed bases)
Quarterly review of actual indirect allocations vs. NICRA requirements
Document cost allocation methodology in writing

Finding 5: Subrecipient Closeout Not Verified (2 CFR 200.331)

Description: Grantee did not verify that subrecipients closed out federal awards within 120 days. The grantee's closeout package did not include subrecipient certification or final expenditure reports.

Cause:

Grantee not aware of responsibility for subrecipient closeout verification
Lack of controls to track subrecipient closeout status
Assumption that federal agency directly monitors subrecipient closeout

Auditor Adjustment:

Finding for failure to verify subrecipient compliance
If subrecipient audit later identifies questioned costs, grantee may be held liable

Prevention:

At time of subaward, include specific language that subrecipient must close out within 120 days
Create a subrecipient closeout schedule 30 days before grantee's own deadline
Request and review subrecipient final reports before grantee submits its own
Obtain subrecipient certification of closeout
Document all subrecipient closeout activities in the grant file

Grant Closeout Checklist and Timeline

Use this comprehensive checklist to ensure timely, compliant grant closeout:

60 Days Before Period of Performance Ends

Identify closeout deadline (period end + 120 days)
Calendar the deadline in the finance system and assign responsibility
Notify federal program officer that closeout is approaching
Request any outstanding guidance on allowability of pending costs
Begin equipment inventory (identify all items purchased with federal funds)
Identify all subrecipients and request final reports
Compile grant file (agreements, amendments, correspondence)
Verify indirect cost rate documentation (NICRA or de minimis election)

30 Days Before Period Ends

Prepare preliminary FFR with estimated final expenditures
Reconcile all federal drawdowns to accounting system
Identify any unliquidated obligations (pending invoices, purchase orders)
Complete equipment inventory (physical count, photographs, serial numbers)
Confirm receipt of subrecipient final reports
Begin data entry into FFR system (if automated submission required)
Draft closeout letter to federal agency

On Period End Date

Freeze the grant account (no new purchases)
Reverse any outstanding cost allocations (accruals, overhead)
Print final general ledger reconciliation
Prepare list of accounts payable (what is still owed as of midnight of last day)

Days 1–30 After Period Ends

Post final invoices received (if incurred prior to period end)
Process retainage payments from contractors
Verify final matching fund contributions (for matching-required grants)
Confirm indirect cost allocations are correct through last day
Complete FFR with final actual expenditure numbers
Obtain financial officer or executive director signature on FFR
Obtain legal opinion on compliance certifications (if required)
Finalize equipment disposition documentation
Follow up with subrecipients on missing reports

Days 31–120 (Final Submission Window)

Submit FFR to federal agency (via grants.gov, agency portal, or mail)
Retain copy of FFR and proof of submission (screenshot or receipt)
Respond to any federal agency questions about FFR (typically within 15 days)
Verify subrecipient closeout status
Prepare closeout file with all supporting documentation
Archive accounting records and supporting documents for 3-year retention
Provide final report to governing board/council
Close out grant in accounting system (mark as closed in GL structure)

Post-Closeout (First 3 Years)

Respond to federal monitoring visits or records requests
Respond to audit questions from Single Audits
If any questioned costs are later identified, defend or remit funds
At year 3 + 1 day after FFR submission, may destroy records (unless litigation pending)

Cost Allocation Methodology at Closeout

At closeout, the grantee must reconcile all costs to the approved cost allocation plan or negotiated indirect cost rate agreement (NICRA).

Allowable vs. Unallowable Costs: 2 CFR 200.420–475

The final FFR must exclude unallowable costs. Common unallowable costs identified during closeout audits include:

Cost Category	Allowable	Unallowable	Reason
Salaries (grant-funded position)	Yes	—	Direct cost if time and effort documented
Utilities	Yes	—	Allocated via indirect cost rate
Legal fees (grant compliance)	Yes	—	Direct if incurred for grant purpose
Lobbying activities	No	—	Prohibited under 2 CFR 200.450
Meals (conference, over $75)	Partial	Excess	Limited to federal per diem rates
Entertainment	No	—	Prohibited under 2 CFR 200.438
Underutilization of grant funds	Mixed	—	Depends on reason (savings vs. unauthorized reduction)
Bad debts / doubtful accounts	No	—	Not allowed under 2 CFR 200.444
Fines and penalties	No	—	Not allowed under 2 CFR 200.441

Time and Effort Documentation

If salaries are charged to the grant, the grantee must maintain time and effort records (timesheets or certification) for each employee, showing the percentage of time allocated to the grant.

Best Practice: Obtain employee or supervisor certification monthly, not at year-end. Year-end certifications are unreliable and frequently questioned by auditors.

Record Retention and Documentation Management

What to Retain for 3 Years

Grant agreement and all amendments
Notice of Award (NoA)
Budgets (original, revised, final)
Financial reports (quarterly/annual, final FFR)
General ledger and general journal (grant accounts only)
Expenditure documentation (invoices, receipts, time sheets)
Procurement records (purchase orders, bid sheets, sole-source justifications)
Equipment inventory and disposition documentation
Correspondence with federal agency
Audit reports and management letter responses
Subrecipient reports and audit findings
Cost allocation methodology (NICRA, cost pool calculations)
Matching fund documentation (if required)

Record Organization Best Practices

Organize records by grant fiscal year in a file naming convention that permits easy retrieval:

[Grant Program Code]_[FY]_[Category]
Example: EPA-319_FY2024_Expenditures
Example: FTA-Section5339_FY2023_Equipment

Store digitally (scanned PDFs) with:

Password protection if sensitive (employee names, contract details)
Backup copies in a separate location
Version control if documents are updated (date files appropriately)
Audit trail (show who accessed, when, if document management system is used)

Destruction Protocol

After 3 years from FFR submission date, records may be destroyed, unless:

Litigation is pending related to the grant
A Single Audit finding or questioned cost remains under appeal
A compliance concern has not been fully resolved

Document the destruction (shredding certificate or IT destruction confirmation) for audit evidence.

Conclusion

Grant closeout is not an end-of-period administrative task—it's a critical compliance function that requires planning, documentation, and persistence. Federal agencies take closeout compliance seriously, and audit findings in this area can result in questioned costs, suspension of future funding, and reputational damage.

The keys to success are:

Know the deadlines (120 days for final reports, 3-year retention)
Reconcile continuously (don't wait until closeout to match drawdowns to expenditures)
Manage equipment proactively (inventory, document disposition, obtain federal approval)
Verify subrecipient closeout (don't assume federal agency oversight)
Document everything (retain records for 3 years; let documentation tell the compliance story)

Organizations that make grant closeout a priority, assign clear responsibility, and follow a structured checklist will avoid audit findings and maintain strong relationships with federal funding agencies.

This article was prepared with AI-assisted research by DWU Consulting. It is provided for informational purposes only and does not constitute legal, financial, or investment advice. All data should be independently verified before use in any official capacity.