Pass-Through Challenges: Managing Subrecipients and Contractors
When your organization receives federal grant funding, you may find yourself passing some of that money down to other organizations. Maybe you partner with a local nonprofit to deliver part of your program, or you hire a web designer to build your project’s website.
Sounds straightforward, right? Unfortunately, this is where one of the most common—and costly—compliance challenges in grants management appears: correctly determining whether your partner is a subrecipient or a contractor.
Misclassifying the relationship doesn’t just create extra paperwork—it can lead to audit findings, penalties, returned funds, or even suspended awards. That’s why understanding the difference, documenting your decision, and following the right oversight process is essential.
Why the Distinction Matters
The federal rules on this topic are found in 2 CFR 200.331. They outline the characteristics of a subrecipient versus a contractor and the responsibilities you have in each case.
When you pass federal funding to another organization, you become the prime recipient (or prime grantee). This role comes with major responsibilities—not just disbursing funds, but ensuring they’re spent in line with:
The grant’s terms and conditions
Applicable federal regulations
Your organization’s internal policies
If you get this wrong, the consequences can be serious: audit findings, funding clawbacks, penalties, or paused payments. In other words, the stakes are high.
Subrecipient vs. Contractor: The Key Differences
Subrecipient
A subrecipient:
Carries out a portion of the federal award.
Creates a federal assistance relationship with you.
May determine eligibility for program participants.
Makes programmatic decisions to achieve grant objectives.
Has performance measured against the program’s goals.
Is subject to Uniform Guidance requirements.
Example: Your organization receives a grant for a community health program and partners with a local clinic to provide specific services. The clinic is delivering part of the funded program, so it’s a subrecipient.
Contractor
A contractor:
Provides goods or services for your organization’s use.
Offers similar goods/services to many customers.
Operates in a competitive environment.
Does not make program decisions.
Is not subject to program compliance requirements.
Example: You hire a web designer to build the program’s website. The designer is not delivering the program itself—just providing a service—so they’re a contractor.
How to Make the Right Call
The best way to avoid mistakes is to use a classification checklist. This is a document that helps you apply the 2 CFR 200.331 criteria consistently. Keep the completed checklist in your grant files—it’s your proof if questions arise later.
Remember, even if your decision isn’t perfect, having a clear, documented rationale will work in your favor during an audit.
Monitoring Responsibilities
Once you’ve classified your partner, your oversight obligations depend on the relationship.
For Subrecipients:
Check that they’re not on the excluded or debarred list.
Issue a subaward agreement that includes all required federal elements.
Conduct a risk assessment before awarding funds.
Add special conditions for higher-risk partners.
Monitor performance and compliance regularly (desk reviews, site visits).
Verify single audit status if applicable.
Take prompt action on noncompliance.
Common pitfalls include skipping site visits, missing required reports, having a vague scope of work, and failing to pass down federal terms and conditions.
For Contractors:
Ensure proper procurement per federal standards.
Confirm no conflicts of interest.
Maintain a written contract with clear deliverables.
Verify timely delivery and accurate invoicing.
Your role here is more limited than with subrecipients, but compliance still matters.
Writing Strong Agreements
Whether you’re creating a contract or a subaward, spell out everything. A good agreement should include:
Federal award details (CFDA listing, award number, amount)
Scope of work and budget
Reporting requirements
Audit obligations
Compliance requirements specific to the award
Your right to monitor and access records
Use templates for efficiency, but tailor each agreement to the specific partner and project.
Avoiding Pass-Through Pitfalls
Here’s a simple system to keep your pass-through relationships compliant:
Start with a checklist to classify each partner.
Document your decision and file it.
Build a monitoring plan for subrecipients.
Involve both program and finance teams in oversight.
Train your staff on pass-through compliance requirements.
Organizations that put these systems in place often go from chaos to confidence in managing subawards and contracts.
Final Thoughts
Classifying and managing subrecipients and contractors isn’t just a compliance exercise—it’s a form of risk management. Getting it right protects your funding, your organization’s reputation, and your ability to deliver results.
The bottom line: Funders may not spell it out in plain language, but they will hold you accountable for these decisions. Invest the time now to understand the rules, document your choices, and build strong oversight processes.
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