For all the excitement in using innovative finance to help solve today’s most pressing social problems, an instrument in federal grantmaking has been hiding in plain sight for years: the fixed amount award. This is a simplified grant where payments are made upon achieving pre-negotiated milestones, instead of reimbursing costs, allowing the federal government to pay for outcomes, not inputs. But while fixed amount awards are the epitome of a pay-for-results grant instrument, they may not be widely used that way because their use requires a shift away from direct government oversight of grant spending.

The U.S. federal government provides close to $700 billion in grants each year. This presents an enormous opportunity to use grants in more creative ways. Traditional grantmaking generally involves the funder defining the problem and making grant payments for an activity’s costs, regardless of whether positive outcomes are achieved. By contrast, a fixed amount award defines the intended outcomes up front, then pays upon the grantee achieving results. While there is a clear destination, the grantee determines the best path to get there.

Fixed amount awards can be used as a direct pay-for-results grant, or as part of a broader impact investing structure. And because grants are less regulated than debt and equity investments, they can be designed in more creative ways to attract other sources of capital, such as: recoverable grants that act as a form of bridge funding for start-up social enterprises, first-loss protection for impact investment funds as either subordinated capital or as a “sidecar” facility, or as part of a pay-for-results structure to make outcome payments in a social or development impact “bond” structure. Valuable technical assistance can be provided through design- and preparation-stage grants for impact investments. But amidst the hype and marketing within the impact investing space, it ultimately boils down to how funds are moved. A federal agency can cut through all the noise by using a fixed amount award to simplify its participation in any innovative funding structure.

Read the full article about fixed amount awards for nonprofits by Jonathan Ng & Samuel Jack at Stanford Social Innovation Review.