What Recipients Need to Know if a Federal Grant Is Terminated by the Government

Update: On April 4, 2025, the U.S. Supreme Court overruled a U.S. Court of Appeals for the First Circuit decision that the authors relied upon when providing the analysis related to the Administrative Procedure Act (APA) included in an earlier version of this alert. Holland & Knight has since updated this alert with analysis based on the Supreme Court's decision. (See Step 5: Determine Whether to Challenge the Termination or Proceed with Closeout of the Grant.)

As Holland & Knight previously discussed, the Trump Administration issued an executive order (EO) on Feb. 26, 2025, implementing the U.S. Department of Government Efficiency's (DOGE) "cost efficiency initiative" that (among other things) directs federal government agency heads to review all existing "covered contracts and grants" by March 26, 2025, and terminate or modify these agreements where "appropriate and consistent with the law." For grantees, these reviews may result in unexpected terminations or alterations in funding, necessitating a thorough understanding of the legal rights and obligations involved in either challenging grant terminations or engaging in grant termination settlements and closeout procedures.

The response to a termination notice from a federal agency is influenced by various factors, including the grantee's business strategy, specific terms and conditions of the grant and the agency's rationale for termination. This Holland & Knight alert is designed to assist recipients in triaging their responses upon receiving such a notice and provide guidance on the steps to take and considerations to keep in mind during this process.

Step 1: Review the Termination Notice

Review the termination notice and determine why the grant is being terminated. Federal agencies are required to provide written notice of the termination that includes the specific reason the agency is terminating the grant, the effective date and the portion of the federal grant that is being terminated (i.e., whether it is a full or partial termination). See 2 C.F.R. § 200.341(a). Carefully review the termination notice to understand its implications fully. Pay close attention to the details such as the effective date, reasons cited for termination, and any specific instructions or requirements outlined in the notice. This review is essential to identify any discrepancies or issues that may need to be addressed.

Next, determine whether the grant is being terminated by the agency legitimately – i.e., in accordance with the terms of the grant and the law. Generally, the agency's notice of termination will give one of the following reasons:¹ 1) noncompliance with the terms and conditions of the grant agreement or 2) a finding that the award "no longer effectuates the program goals or agency priorities."

Many notices of terminations received to date have referenced the second termination reason – that the award "no longer effectuates the program goals or agency priorities" of the administration. However, on Oct. 1, 2024, significant changes were made to 2 C.F.R. § 200.340 that radically changed the ability of the government to terminate a grant "if an award no longer effectuates the program goals or agency priorities." Specifically, the government is unable to unilaterally terminate an award for this purpose for grants awarded after Oct. 1, 2024, unless the parties specifically included this as an express termination provision in the grant award itself.² As such, if the agency seeks termination based on this reason and the grant was awarded after Oct. 1, 2024, this is likely a termination being conducted without adequate legal justification – and could be subject to challenge as set forth below.

It is also important to review the termination notice to determine specifics such as the stated effective date (and whether such date is accurate or inaccurate and dated prior to your receipt of the notice) and whether you are being asked to sign a release and/or acknowledge receipt (and, if so, the specific time requirements to do so). Engage legal counsel early if you have questions about your rights, responsibilities and/or obligations.

Step 2: Respond to the Termination Notice in Writing

Upon receiving a termination notice, it is crucial to establish and maintain an open line of communication with your contracting officer. This dialogue can provide clarity on the reasons for termination and any potential remedies or adjustments that might be available. Regular communication can also help in understanding the agency's perspective and negotiating any possible continuations or modifications of the grant.

If there are any uncertainties or questions regarding your rights, responsibilities or obligations under the termination notice, engage legal counsel prior to responding to the agency's termination notice. Legal experts can provide valuable insights into the nuances of the notice and help in formulating a response strategy. They can also assist in identifying any legal grounds for challenging the termination if necessary.

If you identify any deficiencies in the termination notice – such as an effective date that predates the receipt of the notice or a termination reason that appears to be disallowed – it is important to communicate these issues in writing. A written response should clearly outline the perceived deficiencies and provide any supporting documentation or evidence. This formal communication serves as a record of your concerns and can be critical in any subsequent discussions or disputes.

Step 3: Stop the Work Covered by the Termination Notice

Upon receiving a termination notice, it is imperative to halt all activities related to the terminated portion of the grant. This includes stopping any ongoing projects, research or services that fall under the scope of the termination. Any costs incurred after receipt of a termination notice – even for an improper termination – are incurred at risk to the grantee with no guarantee of payment by the government. It is imperative to ensure that all team members are informed promptly to prevent any further expenditure of resources on the terminated work.³

Additionally, it is crucial to flow down the termination notice to any subrecipients and subcontractors involved in the grant. Provide them explicit instructions to cease work immediately. This communication should be clear and detailed, outlining the specific tasks that need to be stopped and any other relevant instructions. Maintaining open lines of communication will help manage expectations and aid compliance with the termination notice.

After stopping the work, document any cost and schedule impacts resulting from the termination. This documentation should include details such as incurred costs up to the termination date, potential costs related to winding down activities and any schedule disruptions. Timely notification to the agency is essential, and it should be done in writing. This written communication serves as a formal record and can be crucial for any subsequent negotiations or settlements.

Step 4: Take Steps to Mitigate the Impact of the Termination

Evaluate the implications of the termination on your organization's operations and financial health. This evaluation should consider both immediate and long-term impacts, including potential disruptions to ongoing projects, changes in staffing needs and shifts in strategic priorities. Develop a plan to address these impacts, which may include reallocating resources, adjusting budgets or seeking alternative funding sources. This assessment will help in making informed decisions moving forward.

Thoroughly document all costs and impacts associated with the termination. Ensure that costs incurred as a result of the termination are accounted for separately from regular operational expenses. This includes separately accounting for costs incurred as a result of a stop-work order or termination notice (e.g., cost of legal advice, storage or disposition of government property, transportation of employees and settlement/termination of subrecipient or contractor agreements). This separation aids in transparency and provides a clear picture of the financial impact of the termination, which is vital for internal analysis and external reporting. Accurate documentation is essential for financial planning and potential reimbursement claims.

Step 5: Determine Whether to Challenge the Termination or Proceed with Closeout of the Grant

Considering whether, how and where to challenge a grant termination presents recipients their own "fork in the road." The initial decision is whether to challenge the legality of the termination of the grant and seek rescission of the termination notice or whether to accept the termination decision and pursue recovery of allowable costs in accordance with the closeout procedures.

Disputing the Termination

Federal courts may have jurisdiction under the Administrative Procedure Act (APA), codified at 5 U.S.C. §§ 551-559, to review whether the final agency action to terminate a grant was arbitrary and capricious and contrary to applicable law. An APA action would be filed in a federal district court located where the recipient resides or where the government agency is located and would assert review under the APA and would seek injunctive relief. As noted below, the applicability of the APA to grant terminations is an evolving area of the law.

Even when an agency relies on authority stated in 2 C.F.R. § 200.340 to terminate a grant when it "no longer effectuates the program goals or agency priorities," some federal district courts have temporarily or preliminarily enjoined such terminations when shown to be arbitrary and capricious or not in accordance with law. If the grant was awarded after Oct. 1, 2024, reliance on this authority to terminate a grant is unlawful unless the grant includes an express provision providing the government with this termination authority.

Even when such authority exists, an agency's discretion is not unlimited. Under the APA, an agency's decision must be rational, and it must reasonably consider all important aspects of the problem, including the reliance interests of grant recipients and program participants and the relative impacts of cutting off funding programs already in place. The agency may also be required to show that the alleged new "priorities" or "program goals" were properly established by authorized personnel following required procedures. The agency may be required to show "good reasons" for its new priorities or goals. In the rushed manner in which the current administration is terminating grants, it is possible that its written explanation of its termination decision is lacking in some of these ways.

Alternatively, recipients may file a breach of contract claim under the Tucker Act at the U.S. Court of Federal Claims. The remedy for a breach of contract claim under the Tucker Act (which is heard exclusively by the U.S. Court of Federal Claims) is limited to monetary "damages." This remedy is well suited for disputes about unpaid costs requested by the recipient but refused by the agency during the closeout process.

Pursuing a review under the APA rather than a breach of contract claim under the Tucker Act can be important because only a district court acting under the APA can issue an injunction requiring the federal agency to rescind its termination decision and allow performance of the grant to continue. Should the pursuit of a Tucker Act breach of contract claim and monetary damages in the context of a grant be a desired path, such monetary damages can include reimbursement of allowable expenses incurred prior to the termination but may be limited in regard to future expenditures. Because grants are intended as pure cost-reimbursement instruments with no allowable profit or fee, the government can argue that any loss of future revenue under the grant may be offset by the expenses the recipient would have incurred to become entitled to such payments.

The key to distinguishing a claim for injunctive relief of an improper grant termination under the APA is to avoid characterizing the claim as a breach of the grant or to request a judgment for damages. Even if a grant recipient has contract claims it could pursue, a district court will inquire into the source of the rights upon which the plaintiff bases its APA claim. When a plaintiff asserts that the government's breach of contract is contrary to federal regulations, statutes or the U.S. Constitution and seeks relief other than money damages, the APA's waiver of sovereign immunity applies and the Tucker Act does not preclude a federal district court from taking jurisdiction.

In recent grant-related APA cases, courts have held they have jurisdiction to review grant terminations whether the plaintiff relies on the right "to be free from government action beyond congressional authority" or challenges the agency's actions "as insufficiently explained, insufficiently reasoned, and otherwise contrary to law" derived from the APA. In short, the key is for the plaintiff to plead and prove that, by terminating the grant, the agency acted in violation of federal law, not the grant itself.

The applicability of the APA to grant terminations is an evolving area of law. The U.S. Supreme Court recently stayed a temporary restraining order issued by a district court enjoining grant terminations that required the agency to make monetary payments. On April 4, 2025, the Supreme Court issued a decision in the Department of Education v. California, 604 U. S. ____ (2025), that stayed the U.S. Court of Appeals for the First Circuit's decision upholding a temporary restraining order requiring the U.S. Department of Education to continue funding diversity, equity and inclusion (DEI) grants the agency had terminated with boilerplate letters citing a change in policy. The Supreme Court characterized the district court's TRO as "enforce[ing] a contractual obligation to pay money" which was likely based on a breach of "contract with the United States," which is within the exclusive jurisdictional purview of the U.S. Court of Federal Claims under the Tucker Act, 28 U.S.C. § 1491. This decision was issued on an expedited basis without full briefing and argument. It is not clear how broadly the Supreme Court's reasoning and holding extend beyond the specific facts of the case it decided. This case should be considered by recipients when thinking through an APA suit in federal district court.

There is no uniform pre-litigation administrative remedy for disputes under federal grants. Instead, each agency is permitted to establish its own individualized administrative procedure. Recipients should review those procedures and consider whether there is an applicable administrative remedy to exhaust before filing an APA action in federal district court.

Closing Out the Grant

If a termination is not based on the recipient's fault or default, the recipient may elect to "accept" the termination and proceed with the agency's administrative process to wind down and close out the grant. This decision could be based on an assessment that the termination decision is sound enough to survive an APA review by a district court or a business judgment that accepting the termination is in the best interests of the recipient.

Navigating the closeout process for government grants following termination requires a strategic approach and adherence to federal regulations. Engaging legal counsel early is important – especially given the number of terminations anticipated to be issued by the Trump Administration. Putting together a well-supported closeout package is essential to recovering termination costs and ensuring compliance with regulatory requirements.

As an initial matter, look to closeout procedures in 2 C.F.R. § 200.344, cost principles in Subpart E of 2 C.F.R. 200 and the appropriate agency supplement. For example, pursuant to 2 C.F.R. § 200.344 (Closeout), closing out the grant includes:

• submitting all reports (financial, performance and those required by the grant)
• liquidating financial obligations incurred under the grant
• refunding any unobligated funds that are not authorized to be retained (see 2 C.F.R. § 200.344; 2 C.F.R. § 200.346; OMB Circular A–129)
• making necessary adjustments to the federal share of costs after closeout reports are received
• accounting for property acquired with federal funds or received from federal government

Conclusion

The unforeseen termination of a federal grant award can be disappointing, disruptive and costly to a recipient. As set forth above, a recipient must balance initial compliance with the termination notice with weighing options to either challenge the legality of the termination under the APA or accept the termination decision and focus on cost recovery under the closeout process.

As set forth above, federal courts are currently hearing cases regarding the termination of grants by the new administration and issuing written decisions, making the path to judicial review and possible injunctive relief under the APA to save a valued program more clear.

Alternatively, navigating the closeout process for government grants following a termination requires a strategic approach and adherence to federal regulations. By thoroughly assessing the basis for termination, submitting required reports, liquidating financial obligations, refunding unobligated funds, adjusting the federal share of costs and accounting for federal property, grantees can effectively manage the complexities involved.

Compliance with regulations such as 2 C.F.R. § 200.344 is crucial to ensure that all actions taken during the closeout process align with federal standards. Maintaining detailed documentation and engaging in open communication with the agency are essential practices that safeguard the grantee's interests and prepare them for any audits or inquiries that may arise.

Grantees are encouraged to seek legal counsel when necessary to navigate any uncertainties and remain informed about changes in regulations or agency requirements. By taking proactive steps and prioritizing compliance, organizations can minimize disruptions and maintain their financial and operational integrity during the grant closeout process.

Notes

¹ Grants can also be terminated for reasons specifically negotiated by the parties in the agreement itself as well as by mutual agreement or by the recipient’s written notification of termination to the agency. See generally 2 C.F.R. § 200.340(a).

² See 2 C.F.R. § 200.340(b) ("The Federal agency or pass-through entity must clearly and unambiguously specify all termination provisions in the terms and conditions of the Federal award." (emphasis added)); Guidance for Federal Financial Assistance, Final OMB Rule, 89 Fed. Reg. 78 at 30089 ("Provided that the language is included in the terms and condition of the award, the revised termination provision at section 200.340 continues to allow Federal agencies and pass-through entities with authority to terminate an award in the circumstances described in paragraph (a)(2) in the prior version of the guidance." (emphasis added)).

³ Otherwise allowable costs incurred to close out the grant may be recoverable.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.