A lot of federal money never goes straight to the organization that does the work. It goes to a state agency or a larger partner, which then passes part of it on. If you receive that money, you may be signing an agreement that looks like a simple local grant but carries federal requirements inside it.
This article explains the roles, how to tell a subaward from a contract, what a subrecipient should expect and what a pass-through entity must do. By the end you'll know which of your awards are pass-through and what to ask about each.
Three roles to know
The Uniform Guidance in 2 CFR 200.1 defines the terms:
- Pass-through entity: a recipient or subrecipient that provides a subaward to a subrecipient to carry out part of a federal program. Its authority flows through the subaward agreement.
- Subrecipient: an entity that receives a subaward from a pass-through entity to carry out part of a federal award. It does not include a beneficiary or participant.
- Recipient: the organization that receives the federal award directly from the agency.
Under 2 CFR 200.331, the federal agency has no direct legal relationship with subrecipients or contractors of any tier. It does monitor the pass-through entity's oversight of first-tier subrecipients. In practice, your contact is the pass-through entity, and your agreement is with it. Federal requirements still apply to your work, and the pass-through must give you the information to comply (more on that below).
Subrecipient or contractor?
The pass-through entity decides, case by case, whether you are a subrecipient or a contractor. The rule says the substance of the relationship matters more than the form of the agreement or what it's called. Under 2 CFR 200.331, no single factor is determinative.
| Points toward a subrecipient | Points toward a contractor |
|---|---|
| You decide who is eligible for the assistance | You provide goods or services within normal business operations |
| Your performance is measured against the objectives of the federal program | You provide similar goods or services to many different purchasers |
| You make programmatic decisions | You normally operate in a competitive environment |
| You're responsible for following the program requirements in the award | Your goods or services are ancillary to the federal program |
| You carry out a public purpose in the authorizing statute | You aren't subject to the program's compliance requirements |
The classification matters because it decides which rules reach you. Under 2 CFR 200.501, federal awards spent as a subrecipient count toward the audit threshold, while payments for goods or services as a contractor don't.
If you're a subrecipient
Under 2 CFR 200.332, the subaward must be identified to you as a subaward and include specific information, such as the federal award identification number, the award date, the period of performance and budget period, the amount of federal funds obligated, the assistance listing number and the indirect cost rate. It must also state the requirements of the subaward, the additional requirements the pass-through imposes, a requirement that you allow the pass-through and auditors to access your records, and closeout terms.
Read that information before you sign. Then:
- Ask what flows down. The agreement should list the federal statutes, regulations and award terms that apply. If it only says "federal rules apply", ask for the list.
- Check the indirect cost rate. If you have an indirect rate negotiated with the federal government, the pass-through must not require you to use the de minimis rate. If you don't have one, the pass-through determines the rate with you, and it can be a rate negotiated between you and the pass-through or the de minimis rate. See indirect costs explained.
- Learn the reporting schedule. A subrecipient submits its final financial and performance reports to the pass-through no later than 90 calendar days after the subaward's period of performance ends, or an earlier date the two of you agreed on (2 CFR 200.344). The reporting and closeout guide covers the details.
- Expect monitoring. The pass-through may offer training, make site visits or arrange specific procedures, depending on its view of your risk.
If you're a pass-through entity
Your responsibilities begin before you sign. Under 2 CFR 200.332, a pass-through entity must:
- Verify the subrecipient isn't excluded or disqualified, which can be confirmed in SAM.gov.
- Evaluate each subrecipient's fraud risk and risk of noncompliance. The factors include its experience with similar subawards, prior audit results, new personnel or systems and any federal monitoring.
- Monitor activities as needed, which includes reviewing financial and performance reports, making sure the subrecipient takes corrective action on significant developments and issuing a management decision on audit findings that relate to the subaward.
- Verify the subrecipient is audited as the audit rules require.
- Consider enforcement action against a noncompliant subrecipient under 2 CFR 200.339 and program regulations.
For some awards, a recipient can use fixed-amount subawards of up to $500,000, but only with prior written approval from the federal agency (2 CFR 200.333).
Monitoring should scale with risk. A first-time subrecipient with a new finance system needs more support than one with several clean audits.
A worked example
Say a state agency receives a federal grant and passes $230,000 of it to a rural clinic as a subaward. The clinic's modified total direct costs (MTDC) for the project are $200,000. The clinic has no negotiated indirect rate, so the agency and the clinic agree on the de minimis rate of 15 percent: $200,000 times 0.15 is $30,000, which brings the subaward to $230,000.
The clinic then asks three questions before signing. Which federal rules apply to this subaward, and where are they listed? When are the final reports due, and is the date earlier than the 90-day outer limit? Will site visits or other monitoring be scheduled? The answers go in the clinic's grants calendar the day the agreement arrives. If a different organization, such as a billing vendor, supplies services to the clinic under the grant, the clinic decides whether that relationship is a subaward or a contract using the same test.
Your next step
List every award your organization holds and mark each one as direct, pass-through or unsure. For each pass-through award, write down the pass-through entity, the federal agency behind it and the person who handles questions. If you aren't sure, ask the pass-through whether your agreement is a subaward under 2 CFR 200.331.
For how partners divide roles in an application, see lead applicant or partner. When a state notice passes federal money through, SoliContraX can take you from that notice to a draft built from your own materials. Start your next application.
Sources
- 2 CFR 200.1, Definitions: pass-through entity and subrecipient (eCFR)
- 2 CFR 200.331, Subrecipient and contractor determinations (eCFR)
- 2 CFR 200.332, Requirements for pass-through entities (eCFR)
- 2 CFR 200.333, Fixed amount subawards (eCFR)
- 2 CFR 200.344, Closeout (eCFR)
- 2 CFR 200.414, Indirect costs (eCFR)
- 2 CFR 200.501, Audit requirements (eCFR)