93. Subawards Vs. Contractors
By the end you'll be able to
- Apply the 2 CFR 200.331 five-factor test to a partner relationship.
- Distinguish programmatic risk from performance risk.
- Explain why misclassification triggers audit findings.
- Draft a one-paragraph classification memo for a draft partner agreement.
The subaward versus contractor distinction is the single most misunderstood classification in federal grants, and it is the one auditors flag most often. In this lesson you learn the five-factor test from 2 CFR 200.331 that determines whether a partner is a subrecipient (carrying out a portion of the program under your pass-through award) or a contractor, also called a vendor, providing goods or services in a competitive marketplace. Misclassifying the relationship distorts your budget, your monitoring obligations, and your audit exposure.
You will work through the substantive differences. A subrecipient has discretion over how the work is performed, is measured against program objectives, bears programmatic risk, must be monitored against federal requirements, and is subject to your pass-through audit oversight. A contractor follows your specifications, is measured against deliverables, bears performance risk on a fixed scope, and is monitored only for contract performance. Procurement rules, indirect cost treatment, and documentation packages diverge sharply between the two.
By the end you should be able to read a draft partner agreement, apply the five-factor test, and write a one-paragraph classification memo explaining which category the relationship falls into and why. That memo is the document an auditor will ask for first, so you might as well write it during proposal development rather than during a finding.
Common mistakes
These are the traps learners hit most often on this topic. Knowing them in advance is half the fix.
Defaulting to "contractor" because procurement is easier.
Subaward administration is heavier, so teams sometimes structure relationships as contracts to avoid the overhead. If the substance is a subaward, the auditor will reclassify it and the procurement file will be incomplete.
Confusing payment method with classification.
The fact that the partner submits invoices on a fee-for-service basis does not make them a contractor. Classification follows the substance of the relationship, not the payment mechanic.
Practice problems
Try each on paper first. Click Show solution only after you've made a real attempt.
- Problem 1A community partner will recruit participants, deliver a curriculum, and report on participant outcomes for the program. Apply the five-factor test and classify the relationship.
Show solution
The partner has discretion over recruitment and delivery (subrecipient marker), is measured against participant outcomes rather than fixed deliverables (subrecipient marker), shares federal compliance responsibility for participant data (subrecipient marker), is carrying out a portion of the program rather than supplying a commodity (subrecipient marker), and is not operating in a competitive marketplace bidding against vendors (subrecipient marker). Classification: subrecipient. Required documentation: pre-award risk assessment, subaward agreement with federal flow-down terms, monitoring plan, Single Audit review schedule.
Practice quiz
- Question 1Which factor most clearly indicates a subrecipient rather than a contractor?
- Question 2Which kind of risk does a contractor primarily bear?
- Reflection 3Why does misclassifying a subrecipient as a contractor most often surface as an audit finding rather than a proposal-stage error?
Lesson 93 recap
The five-factor test in 2 CFR 200.331 separates subrecipients (program partners with discretion and outcome accountability) from contractors (vendors providing goods or services in a marketplace). Misclassification triggers audit findings.
Coming next: Lesson 94 — Subrecipient Monitoring
Next, we operationalize the subrecipient designation by walking through the four-part monitoring stack every pass-through entity must build.
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