For audits under Uniform Guidance, one of the more common errors relates to making the distinctions between procurements through contractors or subcontractors, and subawards through subrecipients. Both of these relate to payments going out to another entity for work performed on an agreement, but there are key differences between the two. What are the main factors of both subcontractors and subrecipients? Below are the descriptions as defined by the Code of Federal Regulations:
Definition of a subcontractor (2 CFR section 200.330(b)):
- Is the entity providing the goods or services within its normal business operations?
- Does the entity provide similar goods or services to many different purchasers?
- Does the entity normally operate in a competitive environment?
- Are the goods or services provided ancillary to the operation of the federal program?
- Is there no requirement in the agreement with the pass-through entity that the entity receiving the funds is subject to the federal program’s compliance requirements?
Definition of a subrecipient (2 CFR section 200.330(a)):
- Does the entity receiving the funds from the pass-through entity determine who is eligible to receive the federal assistance?
- Does the entity receiving the funds from the pass-through entity have its performance measured in relation to whether the objectives of the federal program were met?
- Does the entity receiving the funds from the pass-through entity have programmatic decision-making responsibility?
- Is the entity receiving the funds from the pass-through entity responsible for adhering to applicable federal program requirements specified in the federal award?
- Does the entity receiving the funds from the pass-through entity use the funds to carry out a program for a public purpose specified in authorizing statue(s), as opposed to providing goods or services for the benefit of the pass-through entity?
While the factors listed above can be make the process clear-cut, determining which umbrella a vendor falls under is not always easy in-practice. Agreements are often written in confusing ways, which can include aspects of both a contractor or subrecipient. If there are inconsistencies between the above categories, or if the work a vendor does falls under aspects of both items, how should those be recorded? While the answer is not always clear right away, the most important factor to consider is what is the substance of the agreement?
For example, one agreement could be worded in such a way that directly states the vendor is responsible for compliance with uniform guidance, but the services provided are supporting or ancillary to the primary operations of the grant. In this instance, this would most likely be considered a subcontract, as the most important factor in the grant are the resources provided by the vendor, which would be then used by the granting/contracting organization to complete the associated work.
Or, the agreement could omit any need to comply with federal regulations, but the vendor has significant input on the program, such as making key determinations on when, where, and how the work is performed. In this situation, since the programmatic decision making is the most important part of the agreement, this should be considered a subrecipient. Further, the award document should be revised to include the proper documentation noting the compliance requirements.
When performing work on Federal Awards, it is important to remain compliant with regulations surrounding both procurements and subawards. If you have any questions on whether your vendors should be classified as contractors or subrecipients, as well as determining the appropriate requirements for complying with the associated regulations, please reach out to Aronson’s Nonprofit & Association team here.