A watchdog says the way public bodies in Wales administer grants is "overly complex" and they often fail to learn lessons from past mistakes.
More than 2bn in grant funding is offered every year in Wales, with 500 schemes available.
The auditor general said the system could be streamlined and supervision tightened up.
The Welsh government welcomed the report and said it had been working to improve the management of grants.
The Wales Audit Office (WAO) said Wales, by proportion, uses grants more extensively than the rest of the UK.
They are used to fund projects in schools, transport, social services, housing and regeneration. The voluntary sector also often benefits from a range of grants.
Huw Vaughan Thomas said funding bodies had failed at times to consider the "viability, capacity and capability" of organisations receiving grants.
It also said there was insufficient monitoring of progress, lack of clarity about the results they were expected to achieve, and significant variation in the quality of the management of schemes at a local level.
"Many grants are poorly managed, and it is clear that funders and recipients are failing to learn from past mistakes, including failing to consider alternative approaches," said Mr Thomas.
"However there is evidence that those involved in the grants process want to improve systems and processes and the Wales Audit Office is well placed to continue to support them to do so," he added.
The auditor general said that both funding bodies and grant recipients have started to improve their management to achieve better value for money.
The report found that a Welsh government initiative on grant funding had the potential to cut costs and make the process more efficient.
It added that although there was some improvement in the management of grants by local authorities, some councils in Wales have failed to follow suit.
Darren Millar, chair of the assembly Public Accounts Committee, said: "A significant amount of public money is spent annually on grants funding in Wales, and it is clear that both funders and recipients need to do more to improve the way grants are managed.
"Grants are not always the best vehicle to deliver support from the public sector and the costs associated with administrating grants can often be significant in proportion to the grant awarded; this applies particularly to smaller grants," he added.
Mr Millar said there were "valuable lessons to be learned"
"Grant funders need to make sure that before they award funding, they give proper consideration to the risks relating to grant recipients, and consider the merits of other funding approaches," he said.
A Welsh government spokesperson said: "We welcome the auditor general for Wales' report into grants management in Wales and will consider its findings and respond fully in due course".
The spokesperson added that the Welsh government was committed to managing public spending "as effectively as possible" and that efficiency savings would be made "while continuing to deliver high quality services".
"We have recently developed an effective framework to strengthen our management of grants and this has been welcomed by the AGW in the report published today," the spokesperson added.
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