Scottish Public Finance Manual

The Scottish Public Finance Manual (SPFM) is issued by the Scottish Ministers to provide guidance on the proper handling and reporting of public funds.

Annex 3: grant funding and procured goods and services contracts

Grant funding and procured goods and services contracts 


1. This Annex outlines the differences between grant funding and procured goods and services contracts (procured contracts) and suggests questions to consider when deciding which is most appropriate to use.

2. In principle the difference between a grant and a procured contract is clear:

  • in the case of a grant, the public authority contributes to a project carried out by an external organisation, or contributes directly to that organisation, because the project or activities contribute to the public authority’s policy aims.
  • in the case of a procured contract, the public authority specifies the product or service that it wants and receives that product or service in return for payment;

3. However, in practice it may not always be clear whether something could properly be funded by a grant or whether it should be procured under a contract and Scottish Government has been asked to produce this Annex as an additional easy read guide.

Grant funding

4. A grant is awarded to individuals or organisations by public authorities for specific purposes, often covered in legislation, and usually following an application process.

5. Grants are issued, depending on eligibility and funding, where:

  • The public authority has a legal basis to pay the grant and the grant will further the public authority’s statutory duty
  • the project or organisation being funded contributes to the public authority’s policy aims
  • The money will be used to deliver something (which can include goods, services or works) to someone other than the public authority itself.

6. Grants offer the opportunity to undertake activity that cannot generate enough income to cover its costs. They are ideal for supporting research and development, building capacity or for new activities which over time could become self-financing. Grants are also widely used for specific projects and to cover the core operating costs (such as salaries and overheads) of voluntary and community organisations.

7. No Value Added Tax is payable in respect of grant funding.

8. If the grant has (or could have) an effect on trade or investment between the UK and the European Union the Subsidy control implications should be assessed. Further guidance can be found within the Subsidy control guidance.

Procured goods and services contracts

9. The term public procurement covers the specific activities of buying goods, services and works, from the initial advertising through to the final contract arrangements. It refers to the procedures public bodies must follow when they purchase services. 

10. The public procurement rules describe how the public sector buys these things. The European Union sets rules for all Member States and each Member State has to make these rules the law in their own country. 

11. Procured service contracts must be awarded through genuine and effective competition unless there are exceptional reasons to the contrary.

12. Value Added Tax will, in most cases, be payable.

13. Further guidance on Procurement can be found in the SPFM.

Considering whether a grant or a procured contract is appropriate

14. The following questions may help establish whether a grant or a procured contract is most appropriate. These are intended to serve as guidance only but may provide a strong indication.

  • If the project was not being delivered by the provider, would the public authority need either to pay someone else to do it or do the project itself?
  • If the project was started but not finished, would the public authority need either to pay someone else to finish it or to finish the project itself?
  • Once the project is finished, will the public authority need either to pay someone to continue it or to continue the project itself?
  • Is the public authority, in effect, outsourcing a service, requirement or function?
  • Is the project delivering one of the public authority’s statutory functions?

15. Answering “yes” to any of those questions may indicate that the public authority needs this service to be provided and would therefore suggest that a procured service contract, rather than a grant, may be most appropriate. The key factor is whether the authority needs the work to be completed [Clearly, if a public authority is considering issuing a grant to fund a project, it wants the project to be completed, but the important distinction is whether the authority needs the project to be completed].

16. The following questions may also be useful to consider:

  • What does the public authority require in return for the funding? (A requirement to produce progress reports and evidence of delivery against agreed targets or outputs may be consistent with a grant. However, a requirement to comply with detailed obligations and specific requirements set by the public authority could suggest that a procured contract may be more appropriate).
  • If the project was not completed as agreed, what remedy would the public authority want to have? (Restricting or reclaiming the funding would be consistent with a grant. However, legal action to force completion would suggest that procurement may be more appropriate).

17. For the avoidance of doubt, nothing in this Annex is new, nor does it signify any change in policy.



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