March 17, 2023

The Path to Compliance, Part Two: Identifying Subrecipients of Federal Funds

By Doug Boedeker, Partner, Assurance Services

Federal grants can be a key part of a nonprofit’s funding and operations. However, many financial professionals struggle to understand and apply the various compliance requirements the federal government imposes on grant recipients. This is the second installment in a series of articles that provides practical guidance to assist nonprofits with federal grant compliance. In this article, we will discuss the key items to consider when determining whether a nonprofit organization has entered into a subrecipient relationship as defined by the Uniform Grant Guidance (UGG). A copy of the UGG can be found on the eCFR website.

What is a subrecipient?

Nonprofit organizations that receive federal awards often need to engage other organizations to accomplish the program’s goals. In such cases, the nonprofit needs to consider whether it has taken on the role of a pass-through entity (PTE). When acting as a PTE, the nonprofit organization becomes a conduit for federal funds through which some, or all, of the federal program is carried out by a different entity. In these cases, the entity receiving the federal funds from the PTE is a subrecipient and the agreement between the two organizations is called a subaward.

§200.331(a) of the UGG notes that subrecipients generally have characteristics such as:

A subrecipient determines who is eligible to receive what Federal assistance;
A subrecipient has its performance measured in relation to whether objectives of a Federal program were met;
A subrecipient has responsibility for programmatic decision-making;
A subrecipient is responsible for adherence to applicable Federal program requirements specified in the Federal award; and
A subrecipient, in accordance with its agreement, uses the Federal funds to carry out a program for a public purpose specified in the authorizing statute, as opposed to providing goods or services for the benefit of the pass-through entity.

On the other hand, if the nonprofit organization is purchasing goods or services from another entity that the nonprofit will use in carrying out the federal program, this creates a contractor relationship.

§200.331(b) of the UGG notes that contractors generally have the following characteristics:

A contractor provides the goods and services within normal business operations;
A contractor provides similar goods or services to many different purchasers;
A contractor normally operates in a competitive environment;
A contractor provides goods or services that are ancillary to the operation of the Federal program; and
A contractor is not subject to compliance requirements of the Federal program as a result of the agreement, though similar requirements may apply for other reasons.

The following two examples will help put these concepts into context.

Example of a Subrecipient Relationship

Nonprofit A has received a $1,000,000 federal award to provide food to underserved children. Nonprofit A is located in Big Town and enters into an agreement with Nonprofit B, which is located in Small Town. Under the agreement, Nonprofit B will receive up to $250,000 in funds from Nonprofit A. Nonprofit A will use its federal funds to pay Nonprofit B. Among Nonprofit B’s various responsibilities, it will:

Be responsible for identifying children living in Small Town who are eligible to participate in the program.
Make decisions on how to conduct the operations in Small Town to maximize the impact of the program.
Submit program performance reports to Nonprofit A.
Ensure compliance with all federal requirements related to the program.

In this case, Nonprofit A is a PTE and Nonprofit B is a subrecipient. Nonprofit B has taken responsibility for the management and conduct of the Small Town portion of Nonprofit A’s federal award. Thus, the agreement between Nonprofit A and Nonprofit B is a subaward.

Example of a Contractor Relationship

Now consider a different scenario. Nonprofit C has received a $1,000,000 federal award to provide food to underserved children. Nonprofit C is located in Metro Town and enters into an agreement with Nonprofit D, which is located in Quaint Town. Nonprofit C will use a portion of its federal funds to pay Nonprofit D. Under the agreement, Nonprofit D will provide hourly staff who will distribute food to eligible children in Quaint Town. Nonprofit D’s staff will work under the direction of Nonprofit C’s program team. Nonprofit C will identify the children in Quaint Town who are eligible for assistance. Nonprofit C will be responsible for all program decisions related to the Quaint Town operation and ensure compliance with federal requirements.

In this case, Nonprofit C and Nonprofit D have entered into a contractor relationship. Nonprofit D is merely providing labor that Nonprofit C is using to carry out the program. Nonprofit D has no responsibilities other than to supply the labor and follow Nonprofit C’s supervision. Thus, this is not a subaward, and Nonprofit D is not a subrecipient of Nonprofit C.

Why is the distinction between subrecipient and contractor important?

The distinction between a subrecipient and a contractor is important because the nature of the relationship dictates the applicable federal compliance requirements.

The UGG has specific subrecipient monitoring requirements that PTEs need to undertake to be compliant. If a subrecipient is not properly identified as such, the PTE will likely not perform the required monitoring procedures and will therefore not be in compliance with federal requirements.

A contractor relationship does not require subrecipient monitoring. However, it is a procurement relationship and procurement compliance requirements would apply. (For a discussion of federal procurement requirements, please see the first article in this series.)

Keep in mind that it is common to see terms like contractor, subcontract, subrecipient, subgrant, and subawardee used in agreements between organizations. The important thing to remember is that the facts and circumstances of the agreement determine whether a contractor or subrecipient relationship has been created. Simply calling another entity a contractor in an agreement does not automatically exclude the relationship from being treated as a subaward that would require subrecipient monitoring. The maxim “substance over form” applies when analyzing these relationships.

Again, coming to a proper conclusion as to whether a subaward has been created is critical to ensure compliance with the appropriate federal requirements. When in doubt, nonprofits should seek guidance from qualified advisors and/or the federal awarding agency.

In our next article in this series, we will review the subrecipient monitoring procedures that pass-through entities must follow.

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