Do you follow a consistent process for determining whether you are working with a a contractor or a subrecipient?

This is a critical question every recipient—and subrecipient—of federal funds must ask when managing partnerships. It's required by the Uniform Guidance each time you spend federal funds.

Many organizations are inconsistent in how they distinguish between these two types of relationships. Making the wrong choice can lead to noncompliance and lots of inefficiency.

In this blog, I’ll help you understand the difference between contractors and subrecipients, why it matters, and how to make the right call every time.

Contractor or Subrecipient: What’s the Difference?

 The key difference lies in the nature of the relationship.

• Contractors provide goods or services that are readily available in the marketplace. While their products or services are important, your relationship with them is typically transactional in nature. Contractors follow procurement standards outlined in Sections 200.317 - 200.327 of the Uniform Guidance.
• Subrecipients, on the other hand, partner with you to carry out a portion of the federal award. They are actively engaged in the support of programmatic goals and/or deliverables. Subrecipients follow subrecipient management standards defined in Sections 200.331 - 200.333 of the Uniform Guidance.

Misclassifying these relationships can lead to compliance issues and unnecessary administrative burdens, so it's important to get it right.

Characteristics of Contractors and Subrecipients

Here are some key characteristics to help you differentiate between contractors and subrecipients.

Contractor Characteristics

• Provide goods or services within their normal business operations
• Offer similar goods or services to many different purchasers
• Operate in a competitive environment
• Deliver goods or services that are ancillary to the implementation of the federal program
• Are not subject to compliance requirements of a federal program as a result of your agreement with them

Subrecipient Characteristics

• Determine eligibility for federal assistance
• Have their performance measured by whether federal program objectives are met
• Are responsible for programmatic decision-making
• Must comply with applicable federal program requirements
• Implement programs for a public purpose, rather than simply providing goods or services to the recipient or subrecipient

Making the Right Determination

Not every situation is clear-cut.

Some agreements have characteristics of both contractors and subrecipients. That’s why it's essential (and required by the Uniform Guidance) to use your judgment when classifying each relationship.

Since the determination is ultimately up to you, your auditors generally look for two things: consistency and documentation.

• Consistency: Auditors want to see that everyone in your organization follows a consistent process for making determinations. You need documented guidelines, processes and training to ensure determinations are made consistently across your departments.
• Documentation: Auditors also like to see evidence that the determination was made and approved, preferably by someone responsible for compliance. It's a good practice to document your determination when entering into contracts, especially for any type of services.

Final Thoughts

One of the best ways to ensure compliance and avoid unnecessary work is to maintain two distinct manuals—one for managing contractors (and procurements) and one for managing subrecipients (and subawards). Having two manuals separates the different policies and procedures for each type of relationship, which helps prevent confusion and mistakes.

This simple step not only helps your team follow the correct processes, but also minimizes the risk of overburdening your staff with extra work that isn’t necessary.

Contact us to learn how we can assist developing or updating these manuals.