Nonprofits, do you know the difference between a subcontractor and subrecipient? Knowing the distinction between the two is important…it could save you from a costly Single Audit!

First, some background

When a nonprofit receives a grant or contract from a grantor (nonprofit or government agency), these funds may be considered federal funds. The nonprofit needs to understand if the federal funds are a result of a “subaward” or if the payments received from the grantor are result of subcontractor/vendor relationship. The language in the grant or contract can be confusing and may lead to mistakes on their Schedule of Expenditures of Federal Awards (SEFA).

What’s at stake if you make an error?

The distinction between subrecipient and subcontractor/vendor is important to make in order to have an accurate understanding of the expectations, requirements and ultimately the accuracy of the SEFA. The total expenditures reported in the SEFA is the determining factor for whether an organization has to undergo an audit in accordance with Uniform Guidance (total federal expenditures equal or exceed $750,000 during the fiscal year).

A SEFA with errors (including mixing up the terms subrecipient and subcontractor) could result in an insufficient compliance audit, the potential for audit restatement and additional audit costs.

What is a subrecipient?

A subrecipient is an entity that receives a “subaward” (agreement) to carry out part of a federal program. The subaward creates a federal compliance relationship with the subrecipient.

What is a subcontractor?

A subcontractor, on the other hand, is an entity that receives a legal instrument (a contract), by which an entity (grantor) purchases property or services in order to carry out a project or program under a contract or federal award. A contract is for the purpose of obtaining goods and services for the entity's own use and creates a procurement relationship with the subcontractor.

Common Mistakes and Misunderstandings:

A common mistake we typically see is when nonprofits are completing their SEFA and ask the grantor if the funds are federal or nonfederal. The grantor may respond saying yes their funds are federal, and then provide the CFDA number and amount that was federally funded. However, that does not automatically mean the funds should be considered federal to the nonprofit. The key question to ask the pass-through entity is whether your agreement is considered a subaward with federal compliance requirements or vendor agreement.

If the agreement is considered a subaward, the nonprofit should report the Federal funds received on their SEFA. If the agreement is considered a vendor contract, you do not have to report the federal funds on your SEFA. This could be a difference of needing a Single Audit vs a basic Financial Statement Audit. Make sure you understand the difference—it could save your Organization valuable mission resources!

Questions? Contact us.