1. July 26, 2011 Are you a Subrecipient or Vendor?
Understand your Role to Keep your Federal Grant Funding Safe
TechComm Federal Grant Compliance Alert
Recipients of federal grant awards often execute their grant-funded projects using the
This Alert provides only help of other organizations with specialized expertise. In general, these organizations
general information and may be classified either as grant award subrecipients or as vendors (which are also
sometimes referred to as contractors). Each type of entity can help fulfill important
should not be relied upon as
project needs, but it is vitally important that a grant award recipient carefully consider
legal advice. This alert may the role of each of its partner entities before classifying it as a subrecipient or vendor.
be considered attorney Failure to do so may put the recipient at risk for audit findings, create reporting and
advertising under court and other compliance violations, render project-related costs ineligible for grant funding,
bar rules in certain
and expose the recipient to charges of waste, fraud or abuse. Any of these
occurrences may impair the recipient’s eligibility for future grants.
jurisdictions.
Recipients of federal technology grants funded under the American Recovery and
For more information, contact Reinvestment Act of 2009 (Recovery Act) need to be especially vigilant. Recovery Act
your Patton Boggs LLP funding, under the NTIA Broadband Technology Opportunity Program (BTOP), RUS
attorney or the authors listed
Broadband Initiatives Program (BIP), Smart Grid Investment Program and others,
comes with reporting and compliance requirements that go beyond those of other
below.
federal grant programs. Federal Inspectors General identify subrecipient/vendor
misclassification issues as one of their top concerns when auditing federal grant
Cynthia B. Schultz recipients. Indeed, the Department of Commerce Office of Inspector General has
202-457-6343 identified subrecipient/vendor classification and performance monitoring issues as one
cschultz@pattonboggs.com of the top issues it expects to examine when auditing BTOP grant awards, and NTIA is
Richard R. Cameron also focusing on these issues during its site visits.
202-457-7665
rcameron@theschultz As a general matter, a subrecipient accepts responsibility for executing a portion of the
group.com recipient’s federal grant award, while a vendor provides the recipient with products or
services in the ordinary course of business for its own commercial purposes. In other
cases, OMB Circular A-133 sets forth the basic criteria that the federal government
WWW.PATTONBOGGS.COM uses to distinguish federal grant subrecipients from vendors as follows:
A Subrecipient: A Vendor:
• Determines who is eligible to receive what federal • Provides the goods and services within normal
financial assistance; business operations;
• Has its performance measured against whether the • Provides similar goods or services to many different
objectives of the federal program are met; purchasers;
• Has responsibility for programmatic decision • Operates in a competitive environment;
making;
• Provides goods or services that are ancillary to the
• Has responsibility for adherence to applicable operation of the federal program; and
federal program compliance requirements; and
• Is not subject to compliance requirements of the
• Uses the federal funds to carry out a program of federal program.
the organization as compared to providing goods
or services for a program of the pass-through
entity.

2. Unfortunately, for many federal technology grant recipients, these generic government-
wide criteria can be difficult to apply in the context of a specific grant award and, in
some cases, produce circular results. Compounding this problem, subrecipients are
generally subject to greater obligations to comply with federal grant regulations than
vendors. Many entities a recipient may seek to engage will have difficulty complying
with these requirements and, therefore, would strongly prefer to be classified as
vendors. In cases where the relationship has not been carefully established in advance
of receiving the award, negotiation of this point may need to involve the recipient, the
partner entity and the federal grants or program officers assigned to the award,
creating project delays and potential federal compliance issues.
One bright line test, appearing elsewhere in the OMB Circulars governing federal grant
awards, is that real or personal property purchased or improved with grant funds must
be owned by a grant recipient or subrecipient. So, for example, in the case of BIP and
BTOP awards, an entity that will construct or improve broadband facilities is likely to be
considered a subrecipient if it will own the funded facilities after construction is
complete. In contrast, a construction firm engaged by an award recipient solely to build
broadband facilities that will be owned by the recipient may more easily be considered
a vendor, even if the recipient then places that firm (or another) under contract to
operate and maintain the facilities on its behalf. In such a case, however, the recipient
must make sure to retain ultimate control over, and responsibility for, achieving the
objectives of the award, for example by retaining the right to specify the network
routes, users, and rates, terms, and conditions of service, among other possible
factors.
In many cases, federal grant recipients must follow competitive procurement
processes in selecting both subrecipients and vendors. While competitive procurement
processes for vendors are explicitly discussed in OMB Circulars governing federal
grant awards, subrecipient selection requirements may vary by federal agency or
program. Department of Commerce policies, which govern BTOP awards, for example,
require recipients to make subawards in a manner to provide, to the maximum extent
practicable, open and free competition. As with procurement from vendors, a recipient
should maintain clear documentation of its justification for using less competitive
selection methods, and be prepared to defend this justification when seeking required
approval from the federal Grants Officer for the award to its chosen subrecipient, to the
extent that the subrecipient was not identified in the grant application and approved in
the course of the recipient’s selection for award.
Inadequate or ineffective monitoring of vendors and subrecipients is one area where
auditors commonly issue findings. For example, vendor substitution of inferior products
or services for the ones for which an award recipient originally contracted can result in
disallowance of costs and expose the recipient to allegations of waste, fraud and
abuse involving federal funds.
In general, subrecipient monitoring is even more critical. Subrecipients are subject to
the full panoply of federal grant obligations coextensive with those of the prime
recipient. They are subject to ARRA, financial and performance progress reporting and
recordkeeping requirements, federal procurement and property management
standards, single- or program-specific audit requirements, and the OMB circulars
establishing federal grant administrative requirements and eligibility of award costs.
Commercial, for-profit subrecipients in particular are likely to have difficulty meeting
several of these requirements, such as those governing use of program income

3. generated as a result of the project and those providing for a federal interest in
property acquired or improved with federal funds. In addition, because federal grants
are designed to reimburse the recipient for actual eligible costs, award recipients and
subrecipients may not add a profit component to any costs charged to the grant.
As a result, once the project is underway, a federal technology grant recipient must
have in place subrecipient monitoring mechanisms appropriate to the experience and
organizational capabilities of each subrecipient and the size and complexity of its
subaward in order to ensure subrecipient performance and legal compliance. The
recipient and subrecipient must collaborate mutually to achieve the purposes of the
award, but it is the recipient, not the federal government, that has the direct
relationship with the subrecipient and bears legal and programmatic responsibility for
its performance.
To ensure that it meets these obligations, the recipient should begin by making sure
that the compliance requirements associated with the award are communicated
clearly, both within its own organization and to the subrecipient. In general, recipients
may monitor subrecipients using any of the monitoring tools available to federal
officials for monitoring recipients, such as desk reviews, site visits, audit requirements
and preapproval requirements for specific activities. When necessary, the recipient
may also provide technical assistance and impose corrective measures.
During site visits with recipients, federal program and grant officers are likely to focus
strongly on a recipient’s monitoring plans for subrecipients. Generally, when preparing
for a federal site visit, if not sooner, a recipient should make sure that its subrecipient
monitoring procedures are carefully documented, and that records of its monitoring
activities are complete and well organized. Failure to do so may cause the awarding
agency to impose corrective actions or, in more severe cases, cause the agency to
request further investigation from its Office of Inspector General.
For further information or to discuss any federal grant and loan compliance questions,
please contact Cynthia Schultz, Of Counsel, Patton Boggs LLP at (202) 457-6343 or
Richard R. Cameron, Vice President, The Schultz Group, (202) 457-7665.
This Alert provides only general information and should not be relied upon as legal advice. This alert may
also be considered attorney advertising under court and bar rules in certain jurisdictions.
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