Subrecipient vs. Contractor: What’s the Difference and Why it Matters

At a glance:

• The main takeaway: Subrecipients and contractors may seem similar, but they’re defined and treated very differently by the federal government.
• The impact on your business: Understanding the distinction between subrecipients and contractors can help you and your firm understand your role in carrying out government contracts and where you stand in any given contractual arrangement.
• Next steps: Organizations should identify the roles, responsibilities and remunerations involved with being a contractor or a subrecipient, then use that knowledge to better position their firms when negotiating and undertaking contracts.

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The full story:

The distinction between subrecipients and contractors is critical because it determines whether compliance with subrecipient monitoring regulations apply (at 2 CFR 200.332 Requirements for Pass-through Entities) or procurement regulations apply (starting at 2 CFR 200.318 General Procurement Standards). The steps you must take for each are very different. So how can you tell what’s what?

The definition of a subrecipient is:

“An entity, usually but not limited to non-Federal entities, that receives a subaward from a pass-through entity to carry out part of a Federal award, but does not include an individual that is a beneficiary of such award. A subrecipient may also be a recipient of other Federal awards directly from a Federal awarding agency.”

The key in this definition is that the subrecipient entity carries out part of the award and helps to fulfill the purpose of the grant program according to Federal government regulations.

Characteristics of a subrecipient include:

• Measures performance relative to whether program objectives were met
• Has programmatic decision-making responsibility
• Has responsibility for adhering to applicable federal program requirements specified in the federal award
• Uses passed-through funds in accordance with the agreement to carry out a program for a public purpose rather than providing goods or services for the benefit of the pass-through entity

The definition of a contractor is:

An entity that receives a contract. A contract is defined as, “a legal instrument by which a recipient or subrecipient purchases property or services needed to carry out the project or program under a Federal award.”

The key in this definition is that the prime or secondary awardee is purchasing goods or services from the entity.

Characteristics of a contractor include:

• Provides goods and services within normal business operations
• Provides similar goods and 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 the federal program’s compliance requirements as a result of the agreement (similar requirements may apply for other reasons, though)

Other subrecipient vs. contractor differences include:

• Whether or not there is competition for the award – contractors typically work in a competitive environment.
• Whether it’s a reimbursement-based agreement or not – contractors typically work at fixed price or T&M.
• Who assumes the most risk – contractors usually assume more risk because of the fixed price nature of the agreement.
• Is there cost matching? This is a subrecipient characteristic that you would not find with contractors.
• Is there a demonstrative need for the funding? This indicates a subrecipient relationship where conversely the focus with a contractor is their ability to provide services or goods.
• Form of agreement – generally with contractors, the goods or services being provided are detailed in the contract, whereas with a subrecipient, generally only details of the federal program are provided in the document.

It can be helpful to create a checklist and mark off which subrecipient or contractor characteristics apply to the entity in question, because sometimes they may have characteristics of both and determining which one fits is not always abundantly clear. Remember that under the Uniform Guidance, the substance of the relationship is more important than the form of the agreement when making the determination of whether a subrecipient or contractor relationship exists.

If the relationship is one of a subrecipient, subrecipient monitoring compliance requirements apply (see 2 CFR 200.332) but if it is a contractor, then procurement compliance requirements apply (see 2 CFR 200.318). Each agreement you enter into should clearly state if the other party is a subcontractor or a subrecipient.

If you or someone at your organization needs help with Uniform Guidance, reach out to Aprio.

Related Resources:

Preparing for Your Financial Statement Audit With This Checklist for Government Contractors

Bi-Annual Survey Reports on Occupational Fraud Statistics and the Success of Internal Controls, Among Many Other Findings

Not-For-Profit GAAP: Defining Equity Transfer and Equity Transaction