Federal Funding Freeze: Should Institutions and Government Contractors Prepare for the Worst?

On January 28, 2025, reporters uncovered that President Trump’s pick to head the Office of Management and Budget (OMB) issued a government-wide directive to the heads of every federal agency titled “Temporary Pause of Agency Grant, Loan, and Other Financial Assistance Programs.” The OMB is a federal agency in Washington D.C. with a broad mandate to implement policy and regulations across all federal agencies. This memorandum ordered a review of “all Federal financial assistance programs and supporting activities” to determine if they were consistent with President Trump’s policies.

The Initial Freeze

The headline-grabber was the order that, in the interim, “Federal agencies must temporarily pause all activities related to obligation or disbursement of all Federal financial assistance, and other relevant agency activities that may be implicated by the executive orders, including, but not limited to, financial assistance for foreign aid, nongovernmental organizations, [diversity, equity and inclusion (DEI)], woke gender ideology, and the green new deal.”

The federal funds freeze was slated to go into effect on January 28 at 5:00 p.m. Less than 24 hours later, following lawsuits and massive confusion, the White House rescinded the directive.

This regulatory whiplash holds lessons for institutions, nonprofits and government contractors that get funding from federal grants, loans, and contracts, looking to reduce risk and uncertainty during the Trump Administration.

Timeline: Clarifications, Reversals, and Confusion

Once issued, the OMB federal funds freeze sparked considerable confusion in all manner of recipients of federal funds. By its terms, the OMB directive did not apply to “assistance received directly by individuals” nor would it “impact Medicare of Social Security benefits.” But with just those express carveouts, and as states began to report they could not access federal Medicaid funds, fears mounted that vast swaths of federal funds had been frozen.

The federal funds freeze was immediately challenged in court. Within hours, a coalition of nonprofit groups sought emergency relief from the D.C. federal court to stop implementation of the freeze. In a hastily issued clarification released later that day, the OMB explained the freeze only applied to federal funds that implicated one of seven other Executive Orders issued in recent days by President Trump, such as DEI programs in government or funding for renewable energy programs.

The OMB sought to assure the public that other federal funds would continue to flow to “any program that provides direct benefits to Americans,” including Social Security, Medicare, Medicaid, and food stamps. Nor would the freeze apply to federal funds for “small businesses, farmers, Pell grants, Head Start, rental assistance, and other programs.”

The D.C. federal court agreed to hit the brakes, at least in part, at least for a few days and issued a brief “administrative stay” until February 3, 2025. During this time, the government may not use the directive to pause federal funds from being disbursed under any open award. But that short reprieve did not prevent the OMB from implementing the freeze for the issuance of new awards or any other action implicated by the executive orders.

Twenty-three states and the District of Columbia have filed another federal lawsuit in Rhode Island challenging the directive. In addition, an independent agency that provides information to Congress, the Government Accountability Office (GAO) began reviewing the federal funding freeze to determine whether it complied with federal law.

The Trump Administration will likely argue that its decision to rescind the directive has rendered these lawsuits moot, though they remain pending at this time.

Lessons for Federal Funds Recipients

So, while the OMB did not intend for those “direct benefits to Americans” to be frozen by this directive, many institutions like universities and colleges, nonprofits and nongovernmental organizations (NGOs), and companies contracting with the federal government are being forced to recognize that they face a new reality in which federal funds they were awarded and rely upon could be frozen and subject to additional scrutiny.

While an imminent across-the-board freeze of federal funds appears to be off the table at present, institutions and companies that receive and materially rely on federal funds, grants and awards should not assume that means there will be a lasting thaw allowing federal funds to continue to flow as they have to date.

To the contrary, it would be prudent to plan for the likelihood of a more targeted approach by the Trump Administration in the near future, pausing funds by agency or program at a more granular level. Institutions of higher education, for instance, may want to consider reviewing their federal research grants and applications for federal funds to get a handle on the risk that the flow of those funds could slow, pause, or be permanently eliminated.

Avenues in which to seek redress for any holdup in federal funds, including in submissions to the funding agency or, when necessary, litigation, should be considered and planned for. Institutional recipients of federal grants and funds should take advantage of this potentially brief respite to assess the risk to their funding, to diversify their sources of revenue, and to plan accordingly for any further regulatory freeze in funds.

If you receive federal funding and need to assess your risk in light of the new Executive Orders, please contact the author of this article, your Woods Rogers attorney, or any member of the Government & Special Investigations and Government Contracts teams.