This post was also written by Stephanie E. Giese.

In the Age of Solyndra, adherence to Federal grant requirements is a necessity like never before. Concerns with transparency, misuse of Federal money, program failures, and political embarrassment, all combine to maximize the need for a thorough understanding of grant terms and requirements, and what to do when compliance looks difficult. Careful planning, and pursuit of appropriate grant remedies, can avoid significant grant repayment demands, or worse, from the Federal Government.

On February 8, 2013, the U.S. Department of Energy Office of Inspector General issued a Special Report, (OAS-RA-13-10) detailing the mismanagement behind the award of some $150 million in DOE grant funds, under the Vehicle Technologies Program, to help construct a $304 million lithium ion battery manufacturing plant in Holland, Michigan. The intended result of the project was to create a minimum of 440 jobs, and produce batteries annually to equip some 60,000 electric vehicles by the end of 2013.

No batteries but time for game playing. The DOE IG found that, despite the award of some $142 million, the grantee had yet to manufacture any commercially available battery cells that could be sold for use in electric vehicles. In fact, only 60% of the required production capacity was constructed, and the grantee said another $22 million in grant funds was needed to complete the work. Instead, due to higher than expected labor costs, a lower than expected marketplace for batteries, and the ability of available supply to meet available demand, many employees “spent time volunteering at local non-profit organizations, playing games and watching movies during regular working hours.” The net result – so far – is repayment of some $842,000 in unallowable costs by the grantee back to the DOE.

Ignorance of the law is no defense. The principal mistake the grantee said that it made was not being familiar with DOE grant requirements (contained in 10 C.F.R. Part 600). Specifically, the grantee said that it did not know that Davis-Bacon wage rates applied to subcontractors. Such rates were a major reason for the cost escalations for this project. Further, as project performance deteriorated, the grantee scheduled furloughs and other things for the trained workers to do so that its skilled work force would not be lost. The DOE IG said that these management type decisions, while understandable from a business perspective, did not confer a public benefit and should not have been reimbursed.

And the granting agency shared in the blame. Finally, the DOE IG pointed to significant mismanagement by the DOE National Energy Technology Laboratory (“NETL”). NETL failed to monitor work progress and the financial impact of compliance with imposed labor standards.

“Grantee beware”. The message to be taken from this difficult case is that a grantee must be aware of the scope of Federal requirements that attach to its grants (and contract, cooperative agreements and the like), and their cost and performance impacts. A careful grantee needs to begin being careful when it reviews the actual grant agreement that will bind its performance. Some additional conditions and protections might be negotiated, for example. And, when difficulties begin to arise, seeking grant amendment, or other remedies early in the process can save much damage later. Finally, even in the worst of circumstances, a number of options might be available to non-performing grantees, including through administrative actions, legislation relief, and, ultimately, other venues. It is important to always recall that Inspector Generals are not always correct in their understanding of the law, and, among other things, might create their own “new rules” to achieve what amounts to a quasi-policy outcome. The watch-words when dealing with Federal grants are be careful.