How does an organization determine if federal funding is received under a subrecipient vs. contractor (vendor) relationship?

As the controller at a non-profit organization that receives federal grants, have you ever been asked the following question by your auditors, “are you a subrecipient or contractor (vendor) for this contract?” The accurate classification of subrecipients and contractors is critical to a program’s success and integrity. OMB requires subrecipients that meet established expenditure thresholds to obtain a Single Audit, and correctly identifying the relationship under which funds are received is a key component of calculating expenditures.

The following is a list of indicative characteristics that might be helpful for the determination based on the relative responsibilities of both the non-profit organization receiving the funds and the awarding agency providing the funds. The examples provided here are not intended for use as a checklist or to replace the need for professional judgment and separate consideration of each arrangement on its own merits.

The Subrecipient:

Determines who is eligible to receive financial assistance, and which specific type of federal assistance is to be distributed. For example:

• The organization determines whether a potential customer meets a program’s eligibility requirements for assistance under that program.
• The organization decides the nature and extent of services to be provided.

Has its performance measured against whether it meets the objectives of the program. For example:

• The awarding entity holds the organization responsible for meeting performance targets
  that are tied to program objectives.
• The awarding entity holds the organization responsible for meeting expenditure targets
  to maximize the use of program funding.
• The awarding entity requires the organization to submit regular oral or written progress
  reports and/or explanations of variance relating to program objectives and/or fund
  maximization.
• The awarding entity may sanction the organization if program objectives are not met.
• The organization must submit a comprehensive closeout package at the end of the
  agreement.

Has responsibility for programmatic decision making. For example:

• The organization has the latitude to make decisions within the terms of the agreement.
• The organization makes policy decisions governing how it carries out a program.
• The organization makes operational decisions governing how it carries out a program.
• The organization makes decisions regarding the appropriate assistance for a particular
  customer.

Has responsibility for adherence to applicable program requirements. For example:

• The awarding entity holds the organization responsible for compliance with applicable
  statutes, regulations, rules, policies and guidance.
• The organization receives technical assistance or training from the awarding entity
  relating to program requirements.
• The awarding entity monitors the organization for compliance with applicable program
  requirements.

Uses the funds to carry out its own program as compared to providing goods or
services for a program of the awarding entity. For example:

• The organization performs all or a portion of the scope of work or objectives of the
  award received by the awarding entity.
• The organization’s role requires more than dealing, distributing or selling goods or
  services that support a program.
• The awarding entity identifies the organization’s programmatic involvement as a separate
  scope of work and budget that must be approved by the awarding entity.

The Contractor (Vendor):

Provides goods and services within normal business operations. For example:

• The organization exists for the purpose of providing a particular goods or services.
• The organization receives little, if any, instruction from the awarding entity as to how the
  organization goes about producing the goods or services.
• The organization generally receives payment from the awarding agency after delivery of a particular good or service.
• The organization invoices the awarding entity in the organization’s normal way and is not
  required to submit a comprehensive closeout package to the awarding agency at the end of the agreement.
• The organization assumes the risk if cost of performance increases or requires more time
  than expected.
• The organization has its performance measured against whether it meets specific
  deliverables, rather than a program’s performance outcomes.

Provides similar goods or services to many different entities. For example:

• The organization provides similar goods or services to a number of entities in addition to
  the awarding entity.
• Services provided are of a repetitive nature.
• Goods provided are commonly available.

Operates in a competitive environment. For example:

• The organization competes with other entities to provide a similar good or service.
• The other entities may be governmental, other non-profit organizations or for-profit businesses.

Provides goods and services that are ancillary to the operation of the program. For example:

• The organization aids or supports the program in a subsidiary capacity.
• The organization provides a good or service (in a manner that does not create a
  subrecipient relationship) which enables the awarding entity to carry out its own program.
• The organization provides a particular good or service that enables the awarding entity
  to operate, e.g. office supplies, janitorial services, equipment, staff development,
  printing, travel, etc.

Is not subject to compliance requirements of the program. For example:

• The organization is not responsible for compliance with applicable statutes, regulations,
  rules, policies or guidance specific to the program. This does not preclude the organization from being responsible for adhering to statutes and regulations applicable to performing the services or providing the goods in a competitive environment.
• The awarding entity does not provide the organization with technical assistance or
  training with regard to program requirements.
• The awarding entity does not monitor the organization for compliance with program
  requirements.

Substance over Form:

“Substance” refers to the characteristics of the arrangement and whether those characteristics are more indicative of a subrecipient or contractor (vendor) relationship. “Form” refers to the type of agreement used. Agreements with subrecipients may take a number of forms, such as subawards, subgrants, subcontracts and subagreements. The form is less important to the examination of a relationship than its substance. Labeling an organization as a subrecipient or contractor (vendor) in an agreement does not automatically create one type of relationship or the other. The characteristics of the relationship must always be examined to determine whether the arrangement as a whole has qualities that are more indicative of a subrecipient or vendor relationship.

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