Subrecipient or Contractor? The Determination That Sets Your Compliance Burden

The short answer. A pass-through entity must make a case-by-case determination of whether each agreement it enters with a lower-tier organization casts that organization as a subrecipient or a contractor (2 CFR 200.331). The substance of the relationship governs, not the form of the agreement or the label the parties prefer. A subrecipient relationship triggers the full set of pass-through obligations at 2 CFR 200.332: required award information, a documented risk assessment, monitoring, and audit follow-up. A contractor relationship triggers the procurement standards at 2 CFR 200.317 through 200.327 and nothing more.

The characteristics that indicate a subrecipient

The regulation provides that a subaward is for the purpose of carrying out a portion of the federal award and creates a federal assistance relationship. A subrecipient typically:

• Determines who is eligible to receive federal assistance
• Has its performance measured against whether the objectives of the federal program were met
• Has responsibility for programmatic decision-making
• Is responsible for adherence to applicable federal program requirements
• Uses the federal funds to carry out a program for a public purpose specified in authorizing legislation, rather than providing goods or services for the benefit of the pass-through entity

The characteristics that indicate a contractor

A contract is for the purpose of obtaining goods and services for the pass-through entity’s own use. A contractor typically:

• Provides the goods or services within its normal business operations
• Provides similar goods or services to many different purchasers
• Normally operates in a competitive environment
• Provides goods or services that are ancillary to the operation of the federal program
• Is not subject to the compliance requirements of the federal program as a result of the agreement, although similar requirements may apply for other reasons

Applying the test

The regulation acknowledges that not all of the characteristics will be present in every case, and directs the pass-through entity to use judgment. Two examples from our practice illustrate where the judgment usually lands.

A community health organization receives a federal award to deliver care coordination and engages a smaller community-based organization to enroll and serve participants in a defined neighborhood. The smaller organization determines eligibility, delivers the program, and reports outcomes against the federal program’s measures. It is a subrecipient. Calling the agreement a “services contract” does not change that.

The same health organization engages a software vendor to provide the case management system used to track those participants. The vendor sells the same product to hundreds of customers, has no role in determining eligibility or delivering services, and is not measured against program outcomes. It is a contractor. Calling the agreement a “partnership” does not change that either.

The harder cases involve evaluation. An evaluator engaged to design and conduct the program’s outcome evaluation is usually a contractor: the service is within its normal business, offered to many purchasers, and ancillary to program delivery. An evaluator whose scope includes delivering a program component and whose deliverables are themselves a federal program objective may be a subrecipient. The determination should be written down, with the reasoning, and kept in the file.

What follows from a subrecipient determination

If the organization is a subrecipient, the pass-through entity must, before or at the time of the subaward, provide the information listed at 2 CFR 200.332(b)(1): the subrecipient’s unique entity identifier, the federal award identification number, the Assistance Listing number and title, the federal awarding agency, the amount of federal funds obligated, the period of performance, the indirect cost rate to be applied, and the terms and conditions that flow down from the prime award.

The pass-through entity must then evaluate each subrecipient’s risk of noncompliance (2 CFR 200.332(c)), considering the subrecipient’s prior experience with similar awards, its audit results, whether it has new personnel or systems, and the extent of federal monitoring it already receives. The depth of subsequent monitoring should be proportionate to that assessment.

Monitoring, at a minimum, means reviewing financial and performance reports, following up on deficiencies identified through audits or other means, and issuing management decisions on audit findings that relate to the subaward (2 CFR 200.332(e)). Where the risk assessment warrants, monitoring extends to site visits and agreed-upon procedures engagements.

The cost of getting it wrong

Treating a subrecipient as a contractor is one of the more common audit findings among nonprofit pass-through entities. The consequence is not merely a written finding. Costs paid to a mischaracterized subrecipient may be questioned, and the pass-through entity remains responsible for the subrecipient’s compliance regardless of how the agreement was labeled. The determination takes an hour. The remediation takes considerably longer.

Regulatory references: 2 CFR 200.1 (definitions of “subaward,” “subrecipient,” “contract,” and “contractor”); 2 CFR 200.331 (subrecipient and contractor determinations); 2 CFR 200.332 (requirements for pass-through entities); 2 CFR 200.317 through 200.327 (procurement standards).

This article is general information about federal grant administration. It is not legal or accounting advice.