Every dollar a pass-through entity sends to another organization under a federal award lands in one of two buckets. It is either a subaward to a subrecipient, which brings federal compliance requirements with it, or a payment to a contractor, which is a procurement. The classification decides which rules apply, what the SEFA shows and what the pass-through entity must monitor.
Getting it wrong has a cost either way. Treat a subrecipient as a contractor, and required monitoring and flow-down terms are missing. Treat a contractor as a subrecipient, and a vendor is burdened with compliance obligations that do not belong to it. This guide covers the determination in 2 CFR 200.331 and how a Single Audit tests it. The regulation's text controls; this paraphrases it.
The determination is required and case by case
Under 2 CFR 200.331, the pass-through entity is responsible for making case-by-case determinations of whether the entity receiving federal funds is a subrecipient or a contractor. The regulation also notes that an entity may concurrently receive federal awards as a recipient, a subrecipient and a contractor. The regulation tells the entity to use judgment in classifying each agreement as a subaward or a procurement contract.
Two instructions in the regulation set the approach:
- Substance over form. The substance of the relationship is more important than the form of the agreement. A document titled "contract" does not make a subrecipient a contractor, and a document titled "subaward" does not make a vendor a subrecipient.
- No single test. Some characteristics may point in each direction, and no single factor or combination of factors is necessarily determinative.
The result is a judgment that must be reasoned and documented, not a checkbox.
Characteristics of a subrecipient
A subrecipient carries out part of the federal award. The regulation lists characteristics, which include that the organization:
- Determines who is eligible to receive what federal assistance.
- Has its performance measured in relation to whether the objectives of the federal program were met.
- Has responsibility for programmatic decision making.
- Is responsible for adherence to applicable federal program requirements specified in the federal award.
- Implements a program for a public purpose specified in authorizing statute, as opposed to providing goods or services for the benefit of the pass-through entity.
Characteristics of a contractor
A contract is for obtaining goods and services for the recipient's or subrecipient's use and creates a procurement relationship. The regulation lists characteristics, which include that the organization:
- 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 implementation of a federal program.
- Is not subject to the compliance requirements of a federal program as a result of the agreement, although similar requirements may apply for other reasons.
Putting the factors to work
A useful working paper turns the lists into questions put to each agreement:
- Who decides eligibility? If the other party selects the beneficiaries of the program, the factor points to subrecipient. If it supplies a service to people the pass-through entity selected, it points to contractor.
- How is performance measured? Measured against program outcomes, such as participants served or objectives met, points to subrecipient. Measured against delivery of a product or service to specification points to contractor.
- Who makes programmatic decisions? Discretion over how the program operates points to subrecipient.
- Does the party serve other customers on the same terms? A commercial vendor selling the same service to many buyers, in a competitive market, looks like a contractor.
- Is the party bound by the federal program's rules through this agreement? If the agreement makes the party responsible for adherence to the federal program requirements in the award, the factor points to subrecipient. If it does not, and any similar requirements apply for other reasons, the factor points to contractor.
Record the answer to each question, the evidence and a conclusion. Where the factors split, say which ones carried the decision and why. The regulation says no factor is determinative, so the reasoning is the file's value.
Why the classification matters downstream
Required subaward information and monitoring. Under 2 CFR 200.332, the pass-through entity must identify the agreement as a subaward and include the required information, assess each subrecipient's risk and tailor monitoring to it. A misclassified subrecipient escapes that structure. See the guide on testing pass-through monitoring.
The SEFA. The SEFA reports the amounts passed through to subrecipients. A payment classified as a contract is not reported there. A classification error therefore misstates a required schedule element. See the SEFA guide.
Procurement. A contractor relationship is subject to the procurement rules of Part 200. A payment that was really a subaward but was handled as a purchase may also have skipped the subaward requirements entirely.
The subrecipient's own audit. A subrecipient that spends federal awards at or above the audit threshold needs its own Single Audit. The pass-through entity must verify that its subrecipients are audited as required, which depends on the pass-through entity knowing who its subrecipients are.
How the auditor tests the determination
In a Single Audit of a pass-through entity, the auditor addresses subrecipient monitoring as a compliance requirement and starts with the population. The classification is the first control.
- Get the full list of outside payees under federal awards. Pull from the accounts payable subledger and the grant ledger all payments charged to federal programs to non-employees, then sort out the agreements.
- Obtain the determination documents. Ask for the pass-through entity's documented determination for each subaward and for a sample of contracts.
- Test a sample of contracts for subrecipient characteristics. Read the agreements for eligibility decisions, program outcome measures and flow-down terms. A "vendor" that selects beneficiaries is a flag.
- Test a sample of subawards for contractor characteristics. A "subrecipient" that sells a standard commercial service is a flag.
- Evaluate exceptions. Consider the effect on required subaward information, monitoring and the amounts reported on the SEFA, and decide whether the exception is a finding.
The auditor does not make the determination for the pass-through entity. The auditor evaluates whether the entity made and documented a reasonable one.
Common problems
- Classification by title. The agreement is called a contract, so the entity treats it as a procurement without reading the substance.
- No documentation. The entity classifies agreements but keeps no record of the reasoning.
- Inconsistent treatment. Similar agreements are classified differently across departments.
- Stale classification. An agreement is renewed with changed scope and the original determination is not revisited.
Related reading
The subrecipient monitoring standards page covers the full pass-through requirements, and the Single Audit walkthrough shows where the compliance test fits.
CORAA prepares ready-to-review audit files for US CPA firms, including payee populations and agreement-review schedules. The firm keeps the client, the review and the signature. See /us.
Sources
- Legal Information Institute, 2 CFR 200.331, Subrecipient and contractor determinations: https://www.law.cornell.edu/cfr/text/2/200.331
- Legal Information Institute, 2 CFR 200.332, Requirements for pass-through entities: https://www.law.cornell.edu/cfr/text/2/200.332
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AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error