Background

Office of Management and Budget (OMB) Circular A-133 and the State of Texas Single Audit Circular in Part IV of the Uniform Grant Management Standards (UGMS) require awarding entities to determine whether an arrangement resulting from a particular award that the awarding entity makes to another organization creates a subrecipient or vendor relationship between the awarding entity and that organization. Both OMB and UGMS define the terms “vendor” and “subrecipient”, and provide guidance for distinguishing between the two relationships. The information below expands on the guidance provided by OMB Circular A-133 and UGMS.

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General

Accurate classification of subrecipients and vendors is critical to a program’s success and integrity. Both OMB and UGMS require subrecipients (other than for-profit subrecipients) that meet established expenditure thresholds to obtain a Single Audit. A Single Audit includes a financial audit as well as compliance testing. While for-profit subrecipients are exempt from Single Audit requirements, they are not exempt from compliance requirements, or from other audit or monitoring requirements that a program statute or the resulting agreement require in order to verify the for profit-subrecipient’s compliance with applicable program requirements.

Vendors, on the other hand, are generally not subject to the same level of scrutiny or requirements. The higher level of scrutiny given to subrecipients reflects the significance of their role to carry out a program, as opposed to vendors that support the program but generally do not make decisions or take actions that impact a program’s overall success or failure. Therefore, program compliance requirements are generally not passed through to vendors; however, if a vendor transaction is structured so as to make the vendor responsible for program compliance, the vendor’s records must be reviewed to verify compliance.

It is important that accurate classifications be made early in the purchasing process. Early determination facilitates the request and consideration of appropriate information during the selection process, and impacts whether the resulting agreement includes appropriate terms and conditions that require compliance with program requirements. The responsibilities contracted to an organization ultimately affect the level of oversight that needs to occur by the awarding entity in order to best manage risks that impact a program’s integrity and overall success.

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Definitions

The terms “subrecipient” and “vendor” have the meanings in OMB Circular A-133 §__.105 and UGMS, Part IV §__.105:

Subrecipient – an entity that expends awards received from a pass-through entity to carry out a program. In other words, as found in the OMB Circular A-133 Compliance

Supplement, “a subrecipient relationship exists when funding from a pass-through entity is provided to perform a portion of the scope of work or objectives of the pass-through entity’s award agreement with the…awarding agency.” (A pass-through entity is an entity that provides an award to a subrecipient to carry out a program.)

Vendor – “a dealer, distributor, merchant, or other seller providing goods or services that are required for the conduct of a…program….” In other words, as found in the OMB Circular A-133 Compliance Supplement, “a vendor, on the other hand, is generally a dealer, distributor or other seller that provides, for example, supplies, expendable materials, or data processing services in support of the project activities.”

Guidance in OMB Circular A-133 §__.210 and UGMS, Part IV §__.210 expand on the definitions above by describing the types of characteristics to consider when determining whether an entity is a subrecipient or vendor. The guidance discusses the following points with regard to determining whether a particular arrangement creates a subrecipient or vendor relationship:

  • Examining each arrangement against characteristics that OMB and UGMS identify as being indicative of subrecipient and vendor relationships
  • Considering the substance of a relationship more strongly than its form
  • Exercising professional judgment in making the determination

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Indicative Characteristics

The guidance provided by OMB Circular A-133 and UGMS identifies characteristics that are indicative of subrecipient and vendor relationships. The characteristics are indicators only. Accordingly, neither OMB nor UGMS intend the characteristics to be used as a checklist, recognizing that factors other than those listed might also impact the determination. Therefore, each arrangement must be separately considered as a whole to determine whether its characteristics are more indicative of a subrecipient or vendor relationship.

The following guidance expands on the guidance provided by OMB and UGMS by including examples that further describe each characteristic. As with the characteristics identified by OMB and UGMS, the examples provided by TWC in this guidance are not intended for use as a checklist or to replace the need for professional judgment and separate consideration of each arrangement on its own merits.

Subrecipient

  • Determines who is eligible to receive what financial assistance. For example:
  • Has its performance measured against whether it meets the objectives of the program. For example:
  • Has responsibility for programmatic decision making. For example:
  • Has responsibility for adherence to applicable program requirements. For example:
  • Uses the funds to carry out a program of the organization as compared to providing goods or services for a program of the awarding entity. For example:

Vendor

  • Provides the goods and services within normal business operations. For example:
  • Provides similar goods or services to many different entities. For example:
  • Operates in a competitive environment. For example:
  • Provides goods and services that are ancillary to the operation of the program. For example:
  • Is not subject to compliance requirements of the program. For example:

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Substance over Form

The substance of a relationship is more important than the form. “Substance” refers to the characteristics of the arrangement and whether those characteristics are more indicative of a subrecipient or vendor relationship. “Form” refers to the type of agreement use. Agreements with subrecipients may take a number of forms, such as subawards, subgrants, subcontracts and subagreements. The form is less important to the examination of a relationship than its substance. Similarly, labeling an organization as a subrecipient or vendor in an agreement does not automatically create one type of relationship or the other. The characteristics of the relationship must always be examined to determine whether the arrangement as a whole has qualities that are more indicative of a subrecipient or vendor relationship.

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Use of Judgment in Making Determination

Determinations about whether an organization is a subrecipient or vendor are not always straightforward. For example, no single factor will alone dictate the existence of one relationship or the other in all cases. However, Appendix E of the Department of Labor Employment and Training Administration’s One-Stop Comprehensive Financial Management Technical Assistance Guide does state that, “under no circumstances should a designation of vendor be made for providers that have a financial or performance requirement related to eligibility or selection of participants.”

Similarly, an organization need not possess all of the subrecipient characteristics above in order to be a subrecipient, and may in fact possess some characteristics of both a vendor and subrecipient under the same agreement. Therefore, in each case, the determination of whether a particular entity is a subrecipient or vendor requires professional consideration of the preponderance of facts and evidence of a particular agreement against the definition and guidelines set forth by OMB Circular A-133 and UGMS.

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Determination Tool

The attached Subrecipient vs. Vendor Response Form may be used and maintained in contract files to document the rationale for such determinations. The form may be modified as needed.

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Subrecipient vs. Vendor Response Form

This form was adapted from the State Comptroller of Public Accounts’ Reporting Requirements for Annual Financial Reports of State Agencies and Universities, July 2007.

Instructions: Circle a yes or no answer and provide an explanation for the answer. Also include references to the contract or other documentation used to arrive at the answers. Use the last column to identify any other factors not specifically addressed that should be considered material to the decision.

Vendor Subrecipient Use of Judgment in Making Decisions
Provides the goods and services within normal business operations.
YES or NO
Reference:
Determines who is eligible to receive what financial assistance.
YES or NO
Reference:
 
Provides similar goods or services to many different purchasers.
YES or NO
Reference:
Has its performance measured against whether the objectives of the program are met.
YES or NO
Reference:
 
Operates in a competitive environment.
YES or NO
Reference:
Has responsibility for programmatic decision making.
YES or NO
Reference:
 
Provides goods and services that are ancillary to the operation of the program.
YES or NO
Reference:
Has responsibility for adherence to applicable program compliance requirements.
YES or NO
Reference:
 
Is not subject to compliance requirements of the program.
YES or NO
Reference:
Uses the funds to carry out a program of the organization as compared to providing goods or services for a program of the pass-through entity.
YES or NO
Reference:
 

 

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