Federal grant money is the lifeblood for many nonprofits. But failing to follow the rules could see them excluded from this type of funding in the future.

By Shannon Winter 

Every year, the federal government doles out billions of dollars in grants to help fund organizations that provide essential services for citizens across the country. This money can be used for a wide range of programs, ranging from crime prevention and infant healthcare to nutritious meals for children and literacy programs. However, there are some strict — and  potentially confusing — regulations and requirements about how the money can be used. And failure to comply with these rules can have major consequences for nonprofits who rely on federal funding to support their missions. 

One area that can be particularly tricky for nonprofit grant recipients (also referred to as the prime nonprofit or a pass-through entity, or “PTE”) is the issue of subrecipient vs. contractor. Many nonprofits rely on contractors and subrecipients to ensure they can provide the level of service the grant requires. This can range from hiring suppliers to using other organizations for planning and implementing purposes. There are several differences between the two, but in some cases subrecipient monitoring is required to be compliant with the rules and regulations regarding government spending. 

Definition of a Contractor 

Here are the criteria for a contractor, according to the federal government: 

• A company that receives a contract from the nonprofit to provide goods or services through a procurement relationship. 

• The goods or services are for the nonprofit's use. 

• The contractors' goods and services are things they do within their normal business operations. They also provide these goods and services to other customers (like a book publisher who sells all types of books to retailers). 

Not all of these characteristics are required for a company to be deemed a contractor. The big thing to know here is that contractors are not required to follow the federal guidelines regarding how the money is spent or engage in other regulatory requirements such as audits, and the prime nonprofit is not required put effort into subrecipient monitoring. 

Definition of a Subrecipient 

A subrecipient is an organization that works with the prime nonprofit to carry out part of its program. When a nonprofit establishes a working relationship with a new organization, the nonprofit is required to determine if this organization is legally a subrecipient. The money that comes from the prime nonprofit is called a “subaward,” and receiving one could require the subrecipient organization to comply with additional regulatory requirements. Here are the criteria for a subrecipient: 

• The organization determines who is eligible to receive what federal assistance. 

• The organization has its performance measured to see if it met the objectives of the federal program. 

• The organization is responsible for making program decisions and acts in accordance with federal program requirements. 

• The organization uses the federal funds to carry out the program's purpose, not by providing goods or services to the benefit of the nonprofit. 

• The organization is required to adhere to the relevant federal program requirements specified by the federal award. 

Not all characteristics need to be present in the subrecipient agreement. However, this designation becomes critically important for both the prime nonprofit and the subrecipient. If subawards exceed $750,000 in federal funding (from all sources), the subrecipient faces additional compliance conditions that include a single audit. The onus is on the prime nonprofit to inform other organizations if they are subrecipients. The prime nonprofit must also expend effort on subrecipient monitoring to verify that they are following federal rules and guidelines on using the money. 

If the prime nonprofit does not ensure the subrecipient complies with the rules, it risks facing several consequences, including:  

• The nonprofit could lose future funding. 

• The nonprofit could be forced to repay funds if the government determines the money was not used appropriately. 

• The nonprofit could be banned from receiving future grants. 

• For egregious acts, like the nonprofit certifying the subrecipient spent the money correctly when it did not, they could face penalties including fines or even jail time. 

The subrecipient faces similar risks if reporting is mishandled, including being barred from receiving future federal funding. 

Below is a summary of the common characteristics of a subrecipient and a contractor. These descriptions can help a nonprofit identify the type of relationship it has with another entity. Note, however, that this determination is not based solely on which side gets the most checkmarks. Not all characteristics need to be present — the substance of the agreement between the nonprofit and other entities is more important than the form. 

Get Subrecipient vs. Nonprofit Assistance and Other Essential Advice Tailored to Your Nonprofit  

Sometimes a prime nonprofit may have difficulty ascertaining which type of relationship it has with another organization — contractor or subrecipient. It is even possible an organization working with a nonprofit may be unaware that they are a subrecipient. For this reason, it is essential that you speak with your accountant to help clarify the situation and avoid potential issues with receiving federal grant money.  

The professionals in BPM’s Nonprofit Industry Group understand the unique operational and financial challenges faced by nonprofits. With an experienced team consisting of over 60 professionals, our group has the knowledge and the resources your organization needs to stay in compliance with the often-complex requirements surrounding the nonprofit sector so you can focus on your cause and your mission. To learn more, contact Shannon Winter, Partner in Assurance and Nonprofit Industry Group Co-Leader, today.