You’re ready to apply for federal funding, and you know your organization cannot implement the project without outside assistance. But how are you getting help? Will you hire contractors to help do a portion of the work you cannot handle inhouse (like hiring a construction firm to build a road) or will you sub-contract a portion of the work (such as giving grant funds to a local nonprofit to provide housing services for those in need)?
More importantly, do you understand the difference between the two? The difference affects everything from compliance requirements to financial reporting, yet it is often misunderstood. And getting it wrong can lead to compliance issues, audit findings, and loss of funding.
The classification of subrecipients versus contractors under federal grants isn’t just an academic exercise—it has real-world implications for how funds are managed, monitored, and reported. Subrecipients are subject to more stringent oversight requirements, including pass-through entity monitoring, compliance with federal regulations, and detailed financial reporting. Contractors, on the other hand, are generally subject to commercial procurement standards and less intensive federal oversight.
The Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, commonly known as the Uniform Guidance (UG) and codified in 2 CFR Part 200, provides the definitive framework for distinguishing between subrecipients and contractors.
According to 2 CFR 200.1, a subrecipient is a non-federal entity that receives a subaward from a pass-through entity to carry out part of a federal program. A contractor, by contrast, provides goods or services for the pass-through entity’s own use and is subject to the procurement standards outlined in 2 CFR 200.317 through 200.327.
Section 200.331 gives characteristics of each, and I find these useful to help me determine if an entity is a subrecipient or contractor. I’m pulling the list of characteristics directly from the Uniform Guidance.
Subrecipients: “Characteristics that support the classification of the entity as a subrecipient include, but are not limited to, when the entity:
(1) Determines who is eligible to receive what Federal assistance;
(2) Has its performance measured in relation to whether the objectives of a Federal program were met;
(3) Has responsibility for programmatic decision-making;
(4) Is responsible for adherence to applicable Federal program requirements specified in the Federal award; and
(5) 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.”
Contractors: “Characteristics that support a procurement relationship between the recipient or subrecipient and a contractor include, but are not limited to, when the contractor:
(1) Provides the goods and services within normal business operations;
(2) Provides similar goods or services to many different purchasers;
(3) Normally operates in a competitive environment;
(4) Provides goods or services that are ancillary to the implementation of a Federal program; and
(5) Is not subject to compliance requirements of a Federal program as a result of the agreement. However, similar requirements may apply for other reasons.”
The classification decision has significant implications for compliance and monitoring requirements. Under 2 CFR 200.332, pass-through entities have specific responsibilities for monitoring subrecipients, including evaluating risk, monitoring performance, reviewing financial and performance reports, and conducting site visits when appropriate.
For contractors, the monitoring requirements are generally less intensive and focus on ensuring that the goods or services are delivered according to the contract specifications rather than on broader program compliance.
Personally, I find it much easier to oversee contractors. And that’s probably why most people would rather deal with contractors than subrecipients. But just because it’s easier doesn’t mean you can classify subrecipients as contractors.
To navigate these complexities successfully, grant managers should document their classification decisions thoroughly, including the rationale for the determination and the specific factors considered. They should also establish clear policies and procedures for making these determinations and ensure that staff responsible for grant management understand the distinction and its implications.
Regular training and consultation with legal counsel or grant management experts can help ensure that these critical distinctions are properly understood and applied throughout the organization.
As always, when in doubt, talk to your funder. Walk them through your thinking (and process) and they can help you determine if an entity you are working with is a subrecipient or a contractor. Trust me, you want to get it correct at the outset (if at all possible).
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