One of the most confusing areas of federal grant compliance for clients and auditors alike is subrecipient monitoring. With the recent federal funding received due to the COVID-19 pandemic, more entities than ever before are being asked to consider whether payments are being made to a subrecipient or contractor. The idea of performing risk assessment, communicating numerous required subaward provisions, performing ongoing monitoring, reviewing single audits and issuing management decisions may be daunting to many organizations. In fact, some of this may be completely new to organizations who, prior to receiving COVID-19 related federal funds, never had subrecipients.
Contractors also have required provisions to be adhered to in accordance with Uniform Guidance. Therefore, making the correct determination as to whether an entity receiving federal funds is a contractor or a subrecipient is extremely important from the beginning. The status of a recipient (contractor or subrecipient) should be clear in the agreement (grant, contract, cooperative, etc.). The responsibility of making the status determination falls on the shoulders of the pass-through entity. The information that follows will shed some light on the issue for pass-through entities struggling with contractor vs. subrecipient determinations.
Definitions: Do These Help?
Uniform Guidance provides the following definitions for contractor and subrecipient:
These definitions do not provide a lot of guidance and many entities try to key in on the name of the agreement between the two entities. For example, if the agreement is a contract, then they are a contractor. If the agreement is a subaward, then they are a subrecipient. While this may be a great internal policy and ease confusion, I caution entities to ensure the underlying characteristics of the relationship support that determination. Uniform Guidance clearly states that a subaward may be provided through any form of legal agreement, including an agreement that the pass-through entity considers a contract. This means that if an entity executed a contract, but the relationship supports a subrecipient relationship, the pass-through entity will be held to the requirements under subrecipient monitoring.
The Devil is in the Details
The crux of the issue, and what makes this subject matter so difficult, is that it requires judgment. There is no exact answer. There is no flow chart or checklist that can be followed that leads to a final decision. The totality of the relationship (under that specific federal program) has to be evaluated. It is up to each individual organization to use the information available and make an informed decision based on professional judgment. Let’s first look at the characteristics of each type of entity.
These characteristics are all clear and nice on paper. However, we are forced to operate in the real world. In the real world, many relationships will involve some elements from both the contractor and subrecipient arenas. To make matters worse, there could be multiple agreements with the same entity, under the same award. Maybe the entity performs a programmatic piece and determines eligibility and charges fees for services provided.
Here is an example relationship that we have seen in an audit engagement:
Is the nonprofit a contractor or a subrecipient of the county? The answer is, unfortunately, it depends. There are elements of both a contractor and a subrecipient involved. When this is the case, the overall relationship needs to be considered. Are the eligibility determinations and reimbursement for payroll 90% of the agreement or are the fees the major percentage? What does the nonprofit do with the eligibility determinations? Does it just return the determinations to the county or does this feed into the case management that the nonprofit does? Is the indirect rate, in essence, a profit margin or is it supported by a true indirect cost rate plan? All of these are examples of questions that need to be answered and evaluated in making this determination.
Some of you may be thinking, keep it simple and make the nonprofit a contractor and a subrecipient. Have a contract for the fees for services and a subaward for the eligibility component. This is a fallacy; do not fall into this trap. An entity cannot be both a contractor and a subrecipient under the same federal award. When the relationship is examined in total, there is likely a contract with multiple scopes of work or a subaward with multiple objectives to carry out. How is the subrecipient supposed to know when it has to follow program requirements when their status as a contractor and a subrecipient is ambiguous? This is confusing and flies in the face of everything subrecipient monitoring requirements are trying to achieve (clear communication and oversight).
Ultimately, all the elements above can generally be broken down into a significant question. Is this relationship an exchange transaction where the other entity is performing a good or service for your organization for profit or is this more of a non-exchange transaction where the other entity is performing services or producing goods for the benefit of the public (in accordance with the program requirements)?
What Should You Do?
The key in this process is to document the basis for your decision. Since judgment is involved, your auditors will be looking to see why you made the decision you did. To ease this process, use a checklist or determination tool to assist. Keep this documented for your contractors and your subrecipients. Weigh the quantitative and qualitative aspects of the relationship when considering all the elements. If you follow these, it is unlikely that an auditor would give you a finding for getting it wrong as long as your judgment is reasonable.
The Association of Government Accountants (AGA) has developed a fillable form to assist in making the determination of whether a contractor or subrecipient relationship exists and documenting the decision. This template is freely available here. In addition, should you have any questions regarding contractor versus subrecipient determinations, please contact your Eide Bailly representative. It is far better to discuss the issue as the relationship is being determined before you proceed down the unfamiliar road than at the end when your auditors are questioning whether or not you have a finding. Worse yet, an incorrect determination could have a significant impact on whether the entity receiving federal funds is required to have an audit, which may damage your relationship and detract from the overall objective of carrying out the grant.
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