When an organization receives Federal funds from a pass-through entity (pass-through), it will be classified as either a subrecipient or a contractor, depending on the structure of the agreement. If the funds are a subaward, the organization will be treated as a subrecipient, while if the funds come through as a contract, the organization will be treated as a contractor.

The way the organization is classified is very important and will determine what types of requirements are imposed upon it.

Subrecipients are responsible for compliance requirements and are subject to monitoring from the pass-through. Subrecipients include subawards on their Schedule of Federal Awards in their audit report. Contractors are not responsible for compliance requirements, nor do they include the funds received on a Schedule of Federal Awards in their audit report.

Having a clear understanding of how an organization is classified is particularly important when determining total federal awards. Organizations expending $750,000 or more in Federal awards are required to have a Single Audit. Contract funds should not be included when determining if a Single Audit is required.

Pass-throughs are responsible for making the determination of subrecipient or contractor. Pass-throughs are required to communicate if funds have been determined to be subawards to the subrecipient and provide them with a wealth of other information. Pass-throughs are required to use judgement and should be making determinations on a case by case basis. They should be considering the following characteristics of subrecipients and contractors as described in the Code of Federal Regulations subsection 200.330:

Subrecipient

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

Contractor

• Provides the goods and services within 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 compliance requirements of the Federal program as a result of the agreement, though similar requirements may apply for other reasons.

While it is the responsibility of the pass-through to make the subrecipient/contractor determination, it is the organization’s job to make sure its Schedule of Federal Awards is correct. Improperly including or excluding funds from a Schedule of Federal Awards could cause the Schedule to be materially misstated. Pass-through’s determinations are not infallible. We frequently see that pass-throughs are using boiler plate language in agreements that contradicts the substance of the agreement. Although required, it is not uncommon for subrecipient/contractor determinations not be shared with the recipient organization.

In these instances, organizations should be communicating with the pass-through to get clarification. Recently, we helped an organization evaluate an agreement for a large dollar amount that stated the organization was a subrecipient, but went on to describe many aspects indicative of a contractor relationship. The organization contacted the pass-through and explained its concerns. The pass-through agreed that the substance of the agreement was a contract and because of that determination the organization had less than $750,000 of Federal awards and was not required to have a Single Audit, saving them a fair amount of money in audit fees and additional personnel costs preparing for the compliance testing.

Ideally, any clarifications should take place near to when the document is signed. If the organization does not understand the nature of the agreement, it is very unlikely it will be able to comply with all the necessary requirements. In fact, we’ve seen instances where a pass-through will request to see a copy of the recipient’s Single Audit or other compliance audit as part of subrecipient monitoring, however the recipient never had one because they thought they were a contractor.

As you can see, the subrecipient/contractor determination is very important. Understanding the agreements and proactive communication will help your organization get it right.