The Truth Behind the Three-Day Rule

February 9, 2011 | By Jerry Ashworth | Post a Comment

So you just drew down federal funds for your grant program. Okay, now the clock is ticking to disburse those funds within three days to meet the “three-day rule.” Or is it? As it turns out, there is no specific Office of Management and Budget requirement concerning the timing of disbursing cash.

Many grantees, as well as federal agencies, interpret OMB language to advance only enough cash to meet actual, immediate cash needs to mean that no more than three days’ cash may be kept on hand. This interpretation is commonly known as the “three-day rule,” under which a grantee can have cash received from the grantor agency on hand for up to three days before spending it. Although there is no statute or rule requiring grantees to disburse payments within three days, the “three-day rule” stems from the Standard Form 425, Federal Financial Report, which instructs grantees to report the amount of idle cash they are holding and indicate the estimated number of days until the cash will be expended. If more than three days’ cash is on hand, grantees are asked to explain why the drawdown was made prematurely or provide other reasons for the excess cash.

Although there is no hard and fast rule, grants management consultant Bob Lloyd said during a Thompson audio conference Monday on internal controls that grantees should closely monitor their cash drawdown procedures. Grantees drawing down funds should put them in an interest-bearing account, and any interest earned should be refunded to the federal government. “The more interest you’re earning, the more you’re signaling the fact that you prematurely drew down the cash,” he said. “The government will ask why you’re holding cash for extended periods of time and you may have weaknesses in controls. I would refund the interest and monitor drawdowns more effectively to time them to make disbursement as soon as you get the funds.” Good advice!

The Federal Grants Management Handbook also provides in-depth discussion on this issue. Have you been told to meet a three-day rule? Let us hear your experiences.

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