Federal grant funding is primarily distributed through two distinct mechanisms: discretionary grants and mandatory grants. This lesson outlines how each type is awarded, the role of federal agencies in the process, and the legal frameworks guiding their distribution.
Key Insights
- Discretionary grants are awarded at the judgment of federal agencies. Applications require a merit review process unless federal statute prohibits it.
- These grants are guided by agency priorities, statutory provisions, and budget availability, and are announced through a Notice of Funding Opportunity (NOFO).
- Mandatory grants are awarded to eligible entities under conditions and amounts, or formulas, specified in the authorizing statute. Their permitted uses depend on the program.
This lesson is a preview from our Grants Management Certificate Program. Enroll in a course for detailed lessons, live instructor support, and project-based training.
Editorial clarification (October 5, 2026): The current term is Notice of Funding Opportunity (NOFO). Under 2 CFR 200.205, agencies must review the merit of applications for discretionary awards unless federal statute prohibits that review.
A mandatory grant’s authorizing statute determines eligible recipients, award conditions, and amounts or formulas. This does not mean that every mandatory grant is available only to states or that its funds cannot support a specific project. Check the applicable statute and program terms; see the Grants.gov definition.
Medicaid is administered by states within federal requirements. Medicare is a federal health insurance program, not an example of a grant formula allocating funds to state governments. See CMS’s Medicare and Medicaid comparison (page 6). The recording below is preserved as recorded.
Let's talk about the two types of grants that are issued by the federal government: discretionary and mandatory. Now, discretionary grants, the key is in the word discretion. These are grants that the federal agency has the power and authority to use its own judgment.
Awarding agencies decide the recipients and the amounts, and it's based sometimes on statutory provisions, agency priorities, and their own budgets. All discretionary grants, whether competitive or non-competitive, must undergo a merit review process during the pre-award phase. Additionally, discretionary grants are detailed on what the process is and what the general terms and conditions of any award that comes through the selection of a grantee through the Notification of Funding Opportunity, or the NOFA.
Now, discretionary grants are different from mandatory grants. Mandatory grants, sometimes called formula grants or block grant funding, are formula-based, which is set at the top by Congress and is typically awarded to states and governmental bodies. Think Medicare, Medicaid.
Agencies must make awards as Congress directed them to make to the designated recipients, which are usually state entities, and funds are not tied to specific projects. Once Congress has directed how the money must be set and sent via formula, federal agencies have to abide by that formula for funding.