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The American Reinvestment and Recovery Act, signed on Feb. 17 and intended to stimulate the economy, will quickly provide federal grant funds in unprecedented amounts to a wide array of organizations, including the usual suspects: state, local and tribal governments, colleges and universities, and nonprofits of all kinds. But recipients will also include many for-profit companies that do not typically receive federal grants. With many of those private sector companies unfamiliar with the grants process, they should be especially vigilant to the strings attached to federal money.

Although traditional projects that either directly or indirectly benefit the public are included in the Recovery Act -- such as research, education and health care services to the uninsured -- the act also provides substantial funding for which for-profit companies are eligible, such as the development of green technologies. While even the traditional grant recipients will struggle to keep up with the numerous new requirements placed on Recovery Act funds, new entrants into the world of federal grant funding ought to be careful to understand that though the money from the government may be technically free, it comes with plenty of baggage.

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Consider these three things if your organization is about to compete for and receive Recovery Act funds:

• Watch the optics.

As the folks at American International Group, General Motors, Chrysler, and a host of others are painfully learning, federal assistance comes with a level of public scrutiny unheard of in the private sector. Not only can information about an impending audit of a local organization make its way to the press, when audit reports by the offices of inspector general are completed, they are promptly posted on the Internet, enhancing the negative publicity.

In the case of the Recovery Act, audits and other federal scrutiny are inevitable. The act provides for huge increases in appropriations to offices of inspector general and establishes OIG "reviews," which occur in addition to OIG audits and investigations. The act also establishes a Recovery Act Transparency Board made up of agency inspector generals that possess very broad powers; provides for a Web site to receive citizen complaints involving Recovery Act expenditures; and creates broad whistle-blower protections. Given the recent publicity about the failures of the Securities and Exchange Commission to follow up on complaints about Bernie Madoff, one can expect that even the most far-fetched of complaints will be followed up on by the appropriate OIG or the RATB.

Grantees should always keep in mind that what they are doing can easily end up on the front page of their local newspaper. If a particular situation strikes you as the in-house counsel as problematic, investigate further into the use of grant funds and act accordingly.

• Remember, grants are not contracts.

Recently, we heard a high-ranking federal acquisition official comment that grants are just an outgrowth of the federal procurement system, only a few decades behind in terms of uniformity. Although we certainly agree that uniformity in federal grants administration remains elusive, we can't agree that grants are simply a variation on the federal contract system.

More than 30 years ago, Congress passed the Grants and Cooperative Agreements Act expressly to distinguish between the two. That distinction starts with the purpose of a grant, which is to perform functions for the greater good. The purpose of a contract, on the other hand, is to buy the tools, so to speak, that the government or a grantee needs to perform its public purposes.

By way of example, the Navy buys an aircraft carrier to give it one of the tools it needs to provide for the national defense. Similarly, a Head Start grantee buys school supplies, but to help it provide child development services to children living in poverty. The public purposes, defense and healthy child development, are the ultimate aims of Congress, not the purchasing of ships and supplies.

This need for a public purpose leads to a second and equally important distinction between grants and contracts. Every federal grant program is based upon a specific statutory authorization that provides that public purpose. There is nothing comparable in the federal contract world. Moreover, appropriations for a grant program can be applied only to the purposes found in those authorizing statutes and must be spent by grantees on costs that are "allowable" for that program under the cost principles issued by the Office of Management and Budget.

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