Uniform grant guidance (supercircular): Subrecipient monitoring

 Michelle M. Cain, The Daily Record Newswire

The federal government places many requirements on entities that receive government funding. In December 2013, the Office of Management and Budget effectively consolidated and streamlined these administrative requirements for not-for-profit entities into what has been referred to as the “Uniform Grant Guidance” or “Supercircular.” The Supercircular supersedes and streamlines requirements from eight different grant circulars into one set of guidance.

One of the most significant changes, and most widely commented upon during the rulemaking process, was the more stringent requirements for subrecipient monitoring. These new requirements create a significant administrative burden for organizations to overcome. Non-federal entities (NFE — i.e., states, local governments, Indian tribes, institutions of higher education and not-for-profit organizations) will need to implement the new administrative requirements and cost principles for all new federal awards and to additional funding to existing awards made after Dec. 26, 2014.

Given the timeframe for implementation, organizations need to not only understand these new requirements, but develop and implement processes to achieve compliance while ensuring any additional costs are recoverable.

Subrecipient vs. contractor

It is necessary to understand the difference between a subrecipient and a contractor or what had historically been referred to as a vendor. The nuances between these terms are important and lead to stark differences in the way these services are procured and monitored. Pursuant to §200.330-332 of the Supercircular, a subrecipient “uses the federal funds to carry out a program for a public purpose specified in authorizing statute.” In other words, the subrecipient will carry out a portion of the federal award. A contractor “provides goods or services for the NFE’s own use.” These services are generally ancillary in nature and support the programs or organizations in a general manner.

This determination can be ambiguous at times, and many not-for-profits have been in situations whereby this determination is challenged by an agency auditor, mostly for contractors, which the federal agency believes are subrecipients. From a regulatory perspective, the financial risk associated with these two procurement methods is mitigated in very different ways.

For subrecipients, the cost associated with performance is monitored post-award by the NFE. For contractors, cost risk is mitigated through pre-award procurement methods including full and open competition. A key concept for organizations dealing with these two procurement methods will be fully documenting this decision, especially if something is deemed a contractor rather than a subrecipient, within the procurement records.

Structuring agreements with subrecipients

As the financial and performance risks are mitigated throughout the life of the subaward, it is critical that processes exist to ensure these agreements are structured appropriately to allow for adequate monitoring during the performance period. During the negotiation process, NFEs must ensure that these agreements flow down all requirements imposed by the awarding agency to the subrecipient. In addition, special terms and conditions should be incorporated into the agreement to allow the NFE the ability to monitor the activities of the subrecipient.

These include the ability to accomplish the following monitoring functions:

• Adequate review of financial and programmatic reports;

• Appropriate audit rights;

• Onsite reviews of the program’s operations;

• Appropriate training of staff; and

• Timely action is taken to correct noted deficiencies

In addition, the NFE must negotiate an indirect cost rate for the subrecipient. For NFEs that have never received a negotiated indirect cost rate, the Guidance allows the NFE to charge a de minimis rate of 10 percent of modified total direct costs, which may be used indefinitely. One additional twist to the new requirements is the ability to use fixed amount subawards. So long as the total award value does not exceed the Simplified Acquisition Threshold, i.e., $150,000, and the NFE receives prior approval from the federal agency, then this may be one way to minimize the administrative burden of subrecipient monitoring.

Monitoring subrecipients

For some organizations these new guidelines may require a significant increase in current monitoring requirements. Planning the right strategy to accomplish these requirements is the key to success. Again, the monitoring activities broadly include onsite reviews of operations, review of financial and program reports, appropriate training of staff and a process to ensure timely resolution of deficiencies uncovered during audit.

Organizations will need to choose one of two approaches. The first option is to accomplish these activities internally and refine existing processes to incorporate the additional requirements. Internal audit or program management would be options for these functions.

Organizations can also outsource these functions to external firms so long as these engagements are conducted in accordance with generally accepted government auditing standards (GAGAS), paid for by the NFE, and focused on determining whether the activities and costs are allowable or unallowable, and whether the entity is eligible for awards and maintains adequate reporting.

Cost recovery strategies

Given the increase in requirements and the limited recovery afforded through an indirect rate using a Modified Total Direct Cost base (i.e., only the first $25,000 of subrecipient costs receive an indirect cost allocation), the new guidance allows not only the outsourcing of these new subrecipient monitoring functions, but the recovery of these costs directly to awards. Organizations that may benefit from outsourcing this function should determine the mechanics and best way to allocate the cost to awards in the short-term to ensure such costs are included in their bids on upcoming proposals. Otherwise, these may not be part of the budget or allowed as direct costs going forward. Properly planning now can ensure successful implementation of controls and/or processes to accomplish these broad monitoring requirements.


Michelle M. Cain, CPA is a partner with Mengel, Metzger, Barr & Co. LLP. She can be reached at Mcain@mmb-co.com.