The deadline to obligate American Rescue Plan Coronavirus State and Local Fiscal Recovery Funds (ARP/CSLFRF) has passed, and local governments now have until December 31, 2026, to fully expend their allocated funds. While that may sound like ample time, the countdown is on for local governments to finish their projects—or at least the portions funded by ARP/CSLFRF.

To “expend” funds means the money must be legally owed and payable to a contractor, vendor, or service provider by the deadline. This requirement applies not only to local governments as direct recipients of the funds, but also to any subrecipients they’ve partnered with to implement ARP/CSLFRF projects. It also includes funds a local government received as a subrecipient from the State or another local government. In short: every dollar of ARP/CSLFRF must be fully expended by December 31, 2026.

Projects rarely unfold exactly as planned, and a local government may encounter a range of implementation challenges. Some projects may come in under budget, resulting in surplus funds that need to be reallocated. Others may face cost overruns. Additional common issues include project delays or cancellations due to unforeseen complications; contractor problems such as non-performance or business closure; staffing changes that affect salary expenditures; and, for recipients of over $10 million in ARP/CSLFRF funds, unexpected program income.

Fortunately, the U.S. Department of the Treasury (U.S. Treasury) provides some flexibility for recipients to reallocate funds between obligated projects after the obligation deadline. It also allows for substitution of personnel in obligated positions and execution of new obligations for mandated grant compliance purposes. This flexibility allows communities to continue maximizing the impact of these federal dollars, even in the face of inevitable implementation hurdles. 

However, it is important to proceed with care. Treasury officials have increased compliance monitoring as the program enters its final phase. Recipients must ensure that funds are being spent in accordance with federal (and state) requirements and that detailed documentation is maintained. Proactive and thorough recordkeeping now can help prevent complications in the event of an audit.

Outlined below are the available options for local governments to reallocate ARP/CSLFRF funds before the December 31, 2026 deadline.

Contract Changes

U.S. Treasury has provided recipients and subrecipients of ARP/CLFRF the flexibility to move monies between obligated projects under certain circumstances.

Covering Cost Increases Due to Change Orders or Contingencies

One common issue in government-funded projects is cost overruns due to unforeseen circumstances. Materials may become more expensive, labor shortages may drive up costs, or construction projects may encounter unexpected issues once work begins. If a local government planned for these types of cost increases in the original contract by including the ability to execute change orders or contract contingencies, ARP/CSLFRF funds can be used to cover these additional expenses. 

If an ARP/CSLFRF-obligated project is completed—or is projected to be completed—under budget, or if the local government has received extra program income that was not previously obligated to another project, those funds may be reallocated to cover the change orders or contingencies on another ARP/CSLFRF-obligated project. This flexibility allows a local government to ensure that priority projects can move forward without requiring additional funding from outside sources. However, to qualify, the change orders and/or contract contingencies must have been explicitly provided for in the original contract executed by December 31, 2024.

To properly document this type of reallocation, the local government must maintain clear records showing that the funds originated from an obligated project with surplus funds or from unobligated program income. The project receiving the additional funds must already have been obligated by December 31, 2024. The reallocation must be approved by the governing board through a budget amendment. In addition, all records related to the reallocation—such as the budget amendment, internal approvals, communications, and invoices—should be retained to create a clear audit trail. Proper documentation is essential to ensure compliance with Treasury requirements and to protect the local government in the event of a program audit or review.

Funding Cost Increases from Contract Amendments

At times, a local government may need to amend an existing contract, resulting in additional costs. This can happen when a project must be adjusted to better meet community needs or in response to changing external conditions, such as regulatory requirements, supply chain issues, or unexpected construction challenges. As long as the original contract was obligated by December 31, 2024, and the amended contract maintains substantially the same scope and purpose, these increased costs due to a contract amendment may be covered using ARP/CSLFRF. However, the additional expenses can only be funded using surplus funds from another obligated project that has come in—or is reasonably projected to come in—under budget, or from unexpected program income that was not previously obligated to another project.

To use ARP/CSLFRF funds in this way, the reallocation must be approved by the local government’s governing board. A budget amendment is required to move funds from one project to another or to recognize and appropriate the additional program income. Supporting documentation should also include the amended contract showing the revised cost, a description of the change, justification for the amendment, and evidence that the scope and purpose remain substantially the same as the original obligation. All documentation—contracts, budget amendments, approvals, communications, and related records—should be maintained to establish a clear audit trail. 

Replacing Contractors or Subrecipients

Occasionally, a local government may face the need to terminate a contract or subaward under the ARP/CSLFRF program, which can create challenges in completing the associated project. While replacing a contractor or subrecipient and using additional funds to finish the work is sometimes necessary, this is only permitted under specific, limited circumstances. The U.S. Treasury allows continued use of ARP/CSLFRF funds to complete a project with a replacement contractor or subrecipient only if one of the following three conditions is met:

1. The local government terminates the contract or subaward due to the contractor or subrecipient’s default, because they go out of business, or because the local government determines they are otherwise unable to perform under the contract or fulfill the subaward.
2. The local government and the contractor or subrecipient mutually agree to terminate the contract or subaward for convenience. (Federal requirements mandate that all contracts over $10,000 include provisions for termination for cause and for convenience.)
3. The local government terminates the contract or subaward for convenience due to a determination that the contract was not properly awarded—such as when the contractor was ineligible or the award process was flawed. In this case, the government must document both its determination and that the original agreement was entered into in good faith.

Only when one of these three scenarios applies may the local government enter into a replacement agreement. ARP/CSLFRF funds can then be used to pay the new contractor or subrecipient, even if the replacement results in increased costs, provided the new contract remains substantially similar in purpose and scope to the original and all state and federal procurement laws and other compliance requirements are followed.

If additional funding is needed to complete the project, the local government may use surplus funds from another project that was obligated by December 31, 2024, and has come in—or is projected to come in—under budget, or from unexpected program income that has not already been obligated to another project. In either case, a budget amendment approved by the governing board is required to authorize the transfer of funds or recognition and appropriation of program income. All related documentation—including the reason for termination, procurement records, budget amendments, and updated project financials—must be maintained to ensure compliance with federal requirements and to support future audits or reviews.

Substitute Project

In rare and narrowly defined circumstances, a local government may be able to apply excess ARP/CSLFRF funds to a substitute project. However, this option is only available if the substitute project was fully obligated by December 31, 2024, and was originally funded with local (non-ARP/CSLFRF) dollars. Critically, the local government must have followed all applicable federal regulations and compliance requirements governing ARP/CSLFRF at the time the substitute project was obligated—even though local funds were initially used. This includes adherence to eligible use criteria, allowable cost principles, procurement rules, and all other relevant federal standards.

If the project meets these criteria and was ARP/CSLFRF-eligible from the outset, the local government may be able to reimburse itself with ARP/CSLFRF funds for the portion previously paid with local funds or use ARP/CSLFRF funds to cover remaining project expenses. However, this path presents substantial compliance hurdles. The local government must provide clear and thorough documentation demonstrating that the project was eligible and fully compliant with federal requirements from the start. And the governing board would have to approve budget amendments authorizing the reimbursement or substitution of ARP/CSLFRF for local funds. 

Other New Obligations Allowed After December 31, 2024

Aside from project changes, U.S. Treasury is also allowing new obligations after the obligation deadline to swap personnel in obligated positions or to cover certain new obligations due to mandated grant compliance requirements.

Changing Personnel in Obligated Positions

U.S. Treasury allowed a local government to lock in obligated positions as of December 31, 2024, for the duration of the ARP/CSLFRF grant term. This provision permits the continued use of ARP/CSLFRF funds to cover salaries and benefits associated with obligated positions, even when personnel changes occur or job responsibilities evolve through promotions or reassignments. 

To establish these position obligations, a local government had to meet specific criteria by the December 31, 2024, deadline: the position or portion thereof needed to be eligible under the grant, actively funded by ARP/CSLFRF resources, and occupied by an employee on that date. The U.S. Treasury required a local government that reports quarterly to specify the number of obligated positions in its January 2025 Project and Expenditure Report; a local unit that reports annually will do so in its April 2025 report.

When managing substitutions or replacements within these positions, a local government must clearly document personnel transitions, confirm and record the eligibility and responsibilities of new hires, promptly update financial and reporting records to reflect personnel changes, and explicitly justify any adjustments to job duties or responsibilities. 

Mandated Grant Compliance Costs

The U.S. Treasury authorized a local government to retain some unobligated ARP/CSLFRF funds after the December 31, 2024 deadline to cover anticipated future mandated grant compliance costs. A local government may continue to enter into new contracts or agreements specifically related to obligations arising from federal laws, regulations, or ARP/CSLFRF award terms that apply due to receiving or spending ARP/CSLFRF funds. These compliance costs include personnel expenses incurred for managing the grant—such as reporting, documentation, internal controls, and subrecipient monitoring. They also encompass audit-related expenses directly associated with the ARP/CSLFRF grant and required grant close-out activities. Additionally, a local government using the indirect cost allocation method may continue applying the indirect cost recovery formula to ARP/CSLFRF-funded projects until the grant period concludes.

As of March 2025, quarterly reporters have already provided detailed estimates and justifications for any funds withheld to cover these anticipated compliance costs in their January 2025 Project and Expenditure Report. Annual reporters (those units who received between $0 and $10 million in their own ARP/CSLFRF funds) will provide this information in their April 2025 report. These estimates should only include amounts not already obligated through other permissible methods. At the close of the award, a local government will report the final total spent on these mandated compliance costs.

When entering new obligations for these compliance costs, a local government must follow all applicable federal compliance requirements and maintain thorough documentation. Additionally, prior to initiating these new obligations, the governing board should formally amend the budget ordinance to authorize the expenditures, if it has not already done so.