2 CFR Part 200 Compliance for Municipal Governments and Special Districts
A Practical Guide for Cities, Counties, and Local Government Entities Managing Federal Awards
Local governments that receive federal grants operate under the same compliance framework as universities, school districts, and nonprofits. The Uniform Guidance does not have a simplified version for smaller jurisdictions, and it does not reduce its requirements because a city has limited staff or a county has never been audited before. What it does provide is a clear set of standards that, when built into your administrative systems before money arrives, are manageable. When those standards are addressed only after an audit finding, they become expensive.
This section is written for city managers, county administrators, finance directors, grant coordinators, and public works directors managing federal infrastructure, community development, public safety, or rural services awards.
The Important Distinction Between States and Other Local Governments
2 CFR Part 200 treats states differently from cities, counties, townships, and special districts in several meaningful ways. States may follow their own procurement policies for federal award purchases, provided those policies are at least as restrictive as Part 200's standards. States may follow their own laws and procedures for financial management and equipment management.
Cities, counties, and other units of local government below the state level do not receive these accommodations. They are subject to Part 200's standards directly. A city cannot rely on its standard municipal procurement code to satisfy federal requirements unless that code actually meets Part 200's standards. In most cases it does not, because municipal procurement codes are written for municipal purposes. The result is that cities routinely use purchasing procedures for federally funded projects that do not comply with the regulation, which produces audit findings that could have been avoided with a simple procedural adjustment upfront.
Understanding this distinction is the first step in building a compliant grant management program at the local government level.
Each Federal Award Must Be Separately Trackable in Your Accounting System
Section 200.302 requires every recipient to maintain a financial management system capable of producing, for any given federal award, a complete and accurate picture of obligations incurred, expenditures made against budget, and remaining balance. The system must identify each award by Assistance Listings title and number, Federal Award Identification Number, fiscal year, and awarding agency.
A single cost center labeled "federal grants" that combines expenditures from multiple awards does not comply. A general ledger structure that assigns each award a unique project or fund code that flows through all related expenditure entries does comply. Most municipal accounting systems support this structure, but many municipalities have not configured them that way because federal award management was not the design consideration when the accounting system was set up.
The financial management system must also include written procedures for determining whether costs are allowable under each award, written procedures for payment processes, and effective controls over all funds, property, and assets. These written procedures must be actual documents, not institutional knowledge held by a single finance officer.
Procurement Violations Concentrate in Infrastructure and Construction Awards
Infrastructure grants, capital improvement awards, and construction projects funded through federal programs are where procurement compliance failures concentrate at the local government level. The combination of high dollar values, contractor relationships that predate the federal award, and pressure to move projects quickly creates conditions where competitive procedures get abbreviated or bypassed.
The general procurement standards in Section 200.318 require documented written procurement procedures, prohibition on conflicts of interest in the selection and award process, oversight of contractor performance throughout the contract period, and maintenance of records sufficient to document the history of each procurement transaction.
For construction procurement, sealed bidding is the preferred method under Section 200.320(b)(1). Sealed bidding is appropriate when a complete specification is available, at least two responsible bidders are willing to compete, and the project lends itself to a firm fixed-price contract. For local government recipients specifically, the invitation for bids must be publicly advertised, and bids must be opened publicly.
Competitive proposal procedures through a written request for proposals are available when sealed bidding is not appropriate, but they require public notice, documented evaluation criteria with relative weights disclosed in the solicitation, and a written selection rationale.
Sole source procurement is limited to four circumstances: the transaction does not exceed the micro-purchase threshold (currently $10,000), only one source can fulfill the requirement, a genuine emergency does not permit competitive solicitation, or the federal agency approves a noncompetitive approach in writing. Prior working relationships with a contractor, a contractor's familiarity with local conditions, and administrative convenience are not permissible sole source justifications.
Section 200.324(c) contains an absolute prohibition that catches many municipalities off guard: cost-plus-a-percentage-of-cost contracting is not permitted on federally funded projects under any circumstances. Many local governments have longstanding arrangements with engineering firms or general contractors on percentage-based fee structures. Those arrangements are not allowable on federal awards. Contracts must be either fixed-price or cost-reimbursement with a defined ceiling.
Section 200.324(a) requires an independent cost estimate before receiving bids or proposals on any procurement exceeding the simplified acquisition threshold ($250,000). The estimate must be prepared independently, meaning it cannot be based on the eventual contractor's own cost information.
For construction contracts on federally funded projects exceeding the simplified acquisition threshold, bonding requirements under Section 200.326 apply. These include a bid guarantee of five percent of the bid price, a performance bond for 100 percent of the contract price, and a payment bond for 100 percent of the contract price, unless the federal agency determines the municipality's own bonding policy is adequate to protect the federal interest.
Pass-Through Entity Obligations Cannot Be Delegated to Subrecipients
When a municipality receives a federal award and passes funds to a nonprofit, another unit of government, a special district, or any other organization, the municipality becomes a pass-through entity with monitoring obligations under Section 200.332. The obligations belong to the municipality. They cannot be satisfied by requiring the subrecipient to self-certify compliance.
Before making a subaward, the municipality must verify the subrecipient is not suspended, debarred, or otherwise excluded from receiving federal funds. Verification is accomplished in SAM.gov and must be documented. A subrecipient whose SAM.gov registration has lapsed or who has an active exclusion entered against them cannot receive federal funds from the municipality.
Every subaward document must include: the subrecipient's name and Unique Entity Identifier, the Federal Award Identification Number from the prime award, the award date, the subaward period of performance, the amount obligated, the Assistance Listings number and title, identification of whether the award is for research and development, and the applicable indirect cost rate. If any of this information is unavailable at the time of award, the municipality must provide it when obtained and cannot simply omit it.
During the performance period, the municipality must evaluate the subrecipient's risk, conduct monitoring proportional to that risk, review financial and performance reports, and ensure the subrecipient takes corrective action on any adverse developments. Risk assessment should consider the subrecipient's prior federal grant experience, audit history, whether it has new leadership or new systems, and any direct federal monitoring it receives.
If the municipality's program is audited as a major program in a Single Audit and the subrecipient has findings related to that program, the municipality must issue a formal management decision on those findings within six months.
Central Service Costs Can Be Allocated to Federal Awards Through a Cost Allocation Plan
Cities and counties typically provide centralized services to multiple departments: accounting, human resources, information technology, legal services, motor pool, and facilities management. When federal awards are administered through those departments, a proportional share of those central service costs may be allocated to the awards as allowable indirect costs, provided the allocation is documented in a cost allocation plan.
Section 200.416 and Appendix V to Part 200 govern central service cost allocation plans for local governments. For governments with larger federal programs, the cognizant agency for indirect costs must approve the plan. For smaller governments, simplified approaches may be available.
Section 200.417 provides a straightforward option for interagency service costs: a standard indirect cost rate of 15 percent of direct salaries and wages may be used as a proxy for indirect costs when one department provides services to another. This simplifies the allocation calculation for many inter-departmental service arrangements.
General Costs of Government Are Not Allowable on Federal Awards
Section 200.444 makes the costs of executive and legislative functions of local government unallowable as charges to federal awards. This includes the costs of operating the mayor's office, the city council or board of commissioners, and similar governing functions. These are general governmental costs that belong in the general fund and cannot be allocated to federal awards either as direct costs or through an indirect cost pool.
The line between allowable administrative overhead and unallowable general government costs is not always obvious in practice. Finance department costs that support grant financial management are allowable. City council staff costs that support general governance functions are not. When a local government's accounting system does not clearly separate these functions, the risk of inadvertently allocating unallowable costs to federal awards increases.
Equipment and Property Management Apply to Infrastructure Purchases
Section 200.313's equipment management requirements apply to any equipment purchased with federal award funds, including the heavy equipment, vehicles, and specialized machinery that local governments frequently purchase through infrastructure grants.
Each piece of federally funded equipment requires a property record with the description, serial number, funding source including the Federal Award Identification Number, title holder, acquisition date, purchase cost, percentage of federal contribution, current location and condition, and any disposal information. A physical inventory must be reconciled against property records at least every two years.
Equipment with a current fair market value above $10,000 per unit that is no longer needed for any federal program requires the municipality to calculate the federal agency's proportional share of any sale proceeds before disposal. That share, calculated as the federal percentage of the original purchase price multiplied by the current value or sale price, must be returned to the federal agency.
Record Retention Is Three Years from Final Report Submission
Section 200.334 requires all records related to a federal award to be retained for three years from the date the final financial report is submitted. For property and equipment, the clock runs from the date of final disposition of the asset. For indirect cost rate proposals and cost allocation plans submitted to a federal agency, the clock runs from the date of submission.
Records may be electronic when maintained under quality control procedures that ensure they cannot be altered and remain readable throughout the retention period. Federal agencies, pass-through entities, and auditors have the right of access to all records at any time during the retention period.
SAM.gov Registration Is a Prerequisite for Federal Awards and Subawards
Every local government entity that receives a federal award directly, or that passes through federal funds as a pass-through entity, must maintain an active registration in SAM.gov. SAM.gov registration must be renewed annually.
A lapsed SAM.gov registration can delay or prevent receipt of federal payments, create problems with reporting obligations, and in some circumstances affect the organization's ability to make subawards to subrecipients that also need to be verified in the system.
The Rural Impact Group provides free SAM.gov registration support for local governments and other organizations navigating the registration and renewal process.
Work With The Rural Impact Group
The Rural Impact Group works with cities, counties, and special districts across the country to build federal grant management systems that comply with Part 200 and hold up under audit scrutiny. We assist with procurement procedure development, pass-through entity setup, cost allocation plan development, and ongoing advisory services for organizations managing federal award portfolios.
If this guide identified gaps in your current practices, a Rural Impact Diagnostic is the right place to start.
This guide reflects the current text of 2 CFR Part 200 as of May 29, 2026. It is informational in nature and does not constitute legal advice. Organizations should consult qualified compliance professionals when making compliance determinations for specific awards.