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Reporting Requirements for Annual Financial Reports of State Agencies and Universities

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Reporting Requirements for Annual Financial Reports of State Agencies and Universities

Pass-Through Activity

Federal Pass-Throughs
Distinguishing between Subrecipients and Contractors (Vendors)

Source: The Uniform Guidance (2 CFR 200.331).

Note: Title 2 of the Code of Federal Regulations (2 CFR 200.331) replaced the term “vendor” with “contractor” — However, statewide AFR reporting guidance, statewide SEFA reporting documents and other titles of the Uniform Guidance still use the term “vendor.”

Use the following information to distinguish between non-state entity subrecipients and contractors. For information on pass-through relationships between state agencies, see Interagency Federal Pass-Through Relationships.

  1. General — A non-federal entity may receive federal funds as one or more of the following:
    • Prime (direct) recipient
    • Subrecipient
    • Contractor
    Federal awards expended as a prime recipient or a subrecipient are subject to audit. The payments received for goods or services provided as a contractor are not considered federal awards and are not reported in SEFA, even when the contracted funds are received directly from the federal government. Consider the guidance in paragraphs (B) and (C) below when determining if payments constitute a federal award or a payment for goods and services.
  2. Federal Award — A subrecipient:
    • Determines who is eligible to receive the federal assistance.
    • Has its performance measured against whether the objectives of the federal program are met.
    • Has responsibility for programmatic decision-making.
    • Has responsibility to follow applicable federal program compliance requirements.
    • Uses the federal funds to carry out a program for a specific public purpose as opposed to providing goods or services for the direct benefit of the pass-through entity.
  3. Payment for goods and services — A contractor:
    • Provides the goods and services within normal business operations.
    • Provides similar goods or services to many different purchasers.
    • Operates in a competitive environment.
    • Provides goods and services that are ancillary to the operation of the federal program.
    • Is not subject to compliance requirements of the federal program.
  4. Use of judgment in making determination — When making the determination if the relationship is that of a subrecipient or contractor, the substance of the relationship is more important than the form of the agreement. All characteristics may not be present. Use good judgment to determine if an entity is a subrecipient or contractor.
  5. For-profit subrecipient — Federal audit and compliance requirements applicable to for-profit subrecipients vary by each federal awarding agency. The pass-through entity (prime award recipient) is responsible for following federal guidance and establishing additional requirements (as necessary) to ensure compliance by for-profit subrecipients. The contract with the for-profit subrecipient should describe applicable compliance requirements and the for-profit subrecipient’s compliance responsibility. Methods to ensure compliance for federal awards made to for-profit subrecipients may include pre-award audits, monitoring during the contract and post-award audits. Refer to the federal award requirements, the CFR and the federal compliance supplement when determining applicable compliance requirement for for-profit subrecipients.
  6. Compliance responsibility for contractors — In most cases, the auditee’s only compliance responsibility for contractors is to ensure that the procurement, receipt and payment for goods and services comply with laws, regulations and the provisions of contracts or grant agreements. Program compliance requirements normally do not pass through to contractors. The auditee is responsible for ensuring compliance for contractor transactions. These contractor transactions are structured in such a way that the vendor is responsible for program compliance or the contractor’s records must be reviewed to determine program compliance. Also, when these contractor transactions relate to a major program, the scope of the audit should include determining if these transactions comply with laws, regulations and the provisions of contracts or grant agreements.

Note: In SEFA, federal funds received from non-state entities are considered “pass-throughs from non-state entities.” These funds are not considered pass-throughs in USAS. Instead, these funds are recorded as federal revenue using a federal-related USAS COBJ.

Determining Subrecipient Versus Contractor (Vendor)

Use the Subrecipient vs. Vendor Determination Form PDF to determine contractor (vendor) versus subrecipient identification. Subrecipient versus vendor status is only relevant in USAS when a pass-through between state agencies occurs.