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What is the Difference Between Contracts and Grants?

Government funding comes in all sorts of shapes and sizes. This is exactly why it can be a bit confusing when you’re seeking the best options for financial support. There are two primary avenues to secure government money: contracts and grants. The two might seem fairly similar at first — for example, neither one has to be repaid (as long as the terms of the agreements are upheld). However, the two are quite different in how they are awarded and who bears the “risk.”

In this guide, we’ll go over the most common types of government funding before we get into the differences between grants and contracts. We’ll also share the best types of federal grants along with ways they can be utilized. Understanding these differences in government funding is essential for contractors who want to grow their businesses and gain even more contracting opportunities!

Types of government funding

Government funding is when the government budgets money and financial resources for the procurement of goods or services. These funds help federal agencies outsource specific projects or tasks to businesses of all sizes. When it comes to government funding there are four common types:

  1. Grants are a type of non-repayable funds given to contractors by federal agencies. They’re awarded for specific research or work related to projects with public interest or government policy objectives. 
  2. Contracts are agreements between government agencies and contracting businesses. This type of funding is awarded through a competitive bidding process in which contractors are paid for the deliverables outlined in the contract terms.
  3. Loans backed by the government offer capital and funding at (typically) lower interest rates compared to traditional loans. These loans can be used by business owners to support a variety of their needs such as purchasing equipment or growing their workforce.
  4. Tax incentives encourage specific activities or investments by offering credits, deductions, or exemptions to contractors. In many cases, this type of government funding is used to boost areas of focus such as equipment investment, research and development, or improved hiring, while also reducing the tax burden for businesses.

What are federal grants used for?

Grants are used by federal agencies to provide financial assistance for businesses that support their initiatives and projects. While federal contractors typically do not receive grants, there are instances where a company might contract for the government, and also obtain grants for separate, but related, projects. 

For example, a business wins a Department of Defense contract to construct a new military base while also receiving a research grant from the DoT for developing innovative roadway materials. That being said, here is information about the other types of grants contractors should be aware of:

Types of federal grants

  • Research and development grants support innovation efforts in various fields such as health, science, technology, and medicine.
  • Small Business Innovation Research (SBIR) grants are used to foster technology innovation. The SBA is one of the most common agencies that awards this grant.
  • Community development grants assist in improving communities through various social services and economic opportunities.
  • Environmental grants, as the name suggests, focus on conservation, sustainability, and pollution mitigation efforts. 
  • Education and training grants are used to improve education, bolster job training programs, and foster workforce development opportunities within educational institutions and businesses. 
  • Health and human services grants cover a variety of activities within the public health, healthcare, and social services sectors. A common example is for an agency such as the Centers for Disease Control and Prevention to provide grants to encourage research of a new disease.

Differences between federal grants and contracts

While both forms of financial assistance from government agencies, contracts and grants have several significant differences from how they’re awarded to how they’re utilized. Below is more information on the biggest differences between these two types of funding.


  • Contracts are primarily used to assist various federal agencies in purchasing goods and services.
  • Grants are intended to provide financial support for specific projects aligned with government initiatives and priorities.


  • Common examples of government contracts include a Department of Transportation contract to build a bridge or a DoD contract to assist in manufacturing military equipment.
  • Common examples of government grants can include funding new medical research or developing educational programs in underserved communities.

Award Process

  • Contracts are typically awarded through a complicated bidding process, in which contractors submit proposals with their capabilities, pricing, and proposed solutions. The selection is based on the proposal’s quality, cost-effectiveness, as well as the contractor’s qualifications. 
  • Grants follow a similar competitive process, but the selection criteria are predetermined based on alignment with the goals and priorities of the government agency.


  • For government contracts, the contractor bears the most risk and responsibility for completing the project. These risks can include cost overruns, supply chain disruptions, and labor shortages.
  • With grants, the government has more responsibility for the project’s outcome and therefore assumes more risk. While grant recipients carry out the projects or research, the government faces more uncertainty about effectiveness or feasibility.

Navigating the world of government funding alone isn’t easy

But we make it simple. At FAMR, our dedication lies in helping small businesses navigate through the complexities of government contracting. If you’re just starting your contracting business and haven’t yet registered, we recommend utilizing the support of registration specialists, like the ones at FAMR!

If you’re already registered, head over to the FAMR portal, which streamlines the browsing and bidding process for contracts. This is an excellent starting point for jumping into the industry with a team of government funding specialists to support you along the way!

Give us a call or reach out to us today to see how we can help position your business for more government contracts!

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(855) 718-1264

Mon - Fri 9am-5pm EST