UPDATE May 17, 2023: US Treasury has issued updated guidance for compliance requirements for sub awards to ISP providers for broadband. It is available here. The analysis below continues to apply to all sub awards to other entities except ISP providers. 

As detailed in previous posts, NC local governments are receiving significant funding from the federal American Rescue Plan Act Coronavirus State and Local Fiscal Recovery Funds program (ARP/CSLFRF). The availability of these funds presents many opportunities but also poses challenges for local governments navigating the myriad compliance requirements. Many local governments are spending their ARP/CSLFRF funds for internal expenses (such as salaries and benefits), which trigger fewer compliance requirements, freeing up non-grant funds to be spent on new capital projects or programmatic expenses. (See detailed post on supplanting here.) But many other local governments are spending their ARP/CSLFRF funds directly for capital projects or operational expenses and will need to contract with external parties for goods or services. Local governments routinely enter into contractual agreements. They order supplies from vendors. They procure landscaping, janitorial, financial, audit, architecture, engineering, and IT services. They purchase land, vehicles, and equipment. They contract for construction or repair projects. They partner with nonprofits and other private entities to support community activities. They enter interlocal agreements with other government entities. They provide utility subsidy payments to low-income citizens. These are just a few examples of the myriad types of contracts local governments engage in for operational, capital, and programmatic purposes. Under federal regulations, if these external agreements involve ARP/CSLFRF funds, they take one of three forms—contracts, subawards, or beneficiary payments. Local officials must identify the category an agreement falls in and follow the applicable federal and state processes and substantive requirements for that category.

This post focuses on one category—subawards. It details what a subaward is and defines relevant terms. It explains how to determine if an agreement is a contract, subaward, or beneficiary payment. It then walks through the process and substantive requirements for executing subawards with ARP/CSLFRF funds. It addresses potential different treatment of for-profit subrecipients. Finally, it provides a subaward checklist to help local governments navigate this process.

What is a Subaward?

In implementing the ARP/CSLFRF, US Treasury allows a local government to

transfer [ARP/CSLFRF] funds to any entity to carry out as a subrecipient an eligible use of funds by the transferor, as long as they comply with the Award Terms and Conditions and other applicable requirements, including the Uniform Guidance at 2 C.F.R. §§ 200.331-200.333. Eligible subrecipients include, but are not limited to, other units of government (including Tribal governments), nonprofits and other civil society organizations, and private entities.

As detailed in the interim final rule Supplementary Information, once transfers are received, the transferee must abide by the restrictions on use applicable to the transferor under the [ARP/CSLFRF] and other applicable law, regulations, and program guidance. Further, the transferor remains responsible for monitoring and overseeing the subrecipient’s use of [ARP/CSLFRF] funds and other activities related to the award to ensure that the subrecipient complies with the statutory and regulatory requirements and the Award Terms and Conditions. Recipients also remain responsible for reporting to Treasury on their subrecipients’ use of payments from the [ARP/CSLFRF] for the duration of the award.

US Treasury Final Rule Supplement, pages 358-359 (Final Rule Supplement). The vehicle to accomplish this transfer is called a subaward. As indicated above, a subaward is a particular type of agreement involving federal grant funds. It comes from the Uniform Guidance, 2 CFR 200 (Uniform Guidance), a set of federal regulations that govern grant awards. For state law purposes, a subaward is simply a type of contract, but for federal purposes “subawards” and “contracts” are defined separately and are subject to very different treatment. (Confusing? YES! But hopefully this post helps it make more sense.[1])

Defining Terms

Under the ARP/CSLFRF and Uniform Guidance, a local government is identified as the recipient of the ARP/CSLFRF grant funds. A recipient local government is also referred to throughout the Uniform Guidance as a non-Federal entity. A recipient local government may transfer ARP/CSLFRF funds to a subrecipient to carry out an ARP/CSLFRF authorized project. A local government that makes such a transfer to a subrecipient is further referred as a pass-through entity. A pass-through entity is defined as “a non-Federal entity that provides a subaward to a subrecipient to carry out part of a Federal program.” 2 CFR 200.1. And a subrecipient is defined as an “entity, usually but not limited to non-Federal entities, that receives a subaward from a pass-through entity to carry out part of a Federal award; but does not include an individual that is a beneficiary of such award.” Id. So, if you are keeping track, a local government is a recipient, a non-Federal entity, and a pass-through entity. And the other party to a subaward is a subrecipient.

Subaward, Contract, or Beneficiary Payment?

As stated above, under federal regulations, external agreements involving the payment of grant funds by a recipient local government take one of three forms—contracts, subawards, or beneficiary payments. US Treasury summarizes the difference between a contract and subaward in Q13.9 of its FAQs on the Final Rule:

The Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards in 2 CFR Part 200 (Uniform Guidance) provides definitions for “contract” and “subaward.” A contract is a legal instrument by which a recipient or subrecipient purchases property or services needed to carry out the project or program under a federal award. A subaward is distinct from a contract in that a subaward is an award provided by a recipient of a federal award to a subrecipient to carry out part of a federal award on behalf of the recipient. Recipients may make subawards through any form of legal agreement, including an agreement that the recipient considers a contract.

Thus, for federal grant purposes, if a local government uses ARP/CLSRF funds to pay for an agreement with another entity (government, nonprofit, for profit) whereby the other entity provides goods or services for the benefit of the local government, it is a contractor relationship. And the agreement between the parties is a contract. Common examples include ordering supplies, paying independent contractors to provide services to local governments, engaging architects and/or engineers to design large capital projects, purchasing vehicles or equipment, or hiring contractors for a local government construction or repair project.

Alternatively, if a local government uses ARP/CSLFRF funds to pay for an agreement with another entity (government, nonprofit, for profit) whereby the other entity carries out an ARP/CSLFRF eligible project instead of the local government, it is a subrecipient relationship. And the agreement between the parties is a subaward. Common examples include contracting with a nonprofit to support a community program run by the nonprofit, entering into a reimbursement agreement or formal P3 agreement with a developer, providing funding to a small business to undertake a low income employee training program, entering into an interlocal agreement with another local government to combine funding on a water or sewer project, and, for counties, providing broadband grants to ISPs either directly or through one of the State’s programs.

Some agreements between a local government and other entity are difficult to categorize as either a contract or subaward. The Uniform Guidance provides a checklist to help local governments make the determination. 2 CFR 200.331. In fact, this checklist must be completed (and documented) for each external agreement paid with federal grant funds, excluding payments to beneficiaries.

Finally, payments to the targeted beneficiaries of an ARP/CSLFRF program are neither contracts nor subawards for federal regulatory purposes. The beneficiary payments are not subject to the process or substantive requirements detailed below. Utility, rental, and food assistance programs are examples of beneficiary payments.

What does it mean for an agreement to be categorized as a contract or subaward?

For federal regulatory purposes, if an agreement is a contract, the local government must follow state and federal competitive procurement processes (the most restrictive that applies) and incorporate federal contract term provisions. See 2 CFR 200.317 – .327. But the contracting entity (whether another government, nonprofit, or for-profit entity) is not subject to other ARP/CSLFRF Award Terms and Conditions or Uniform Guidance requirements.

If an agreement is a subaward, however, no competitive process is required to select the subrecipient (again, whether another government, nonprofit, or for-profit entity), but the subrecipient must comply with all ARP/CSLFRF Award Terms and Conditions, Uniform Guidance requirements, and other applicable federal laws and regulations in undertaking the ARP/CSLFRF-eligible project. More on that below.

The subaward process allows a local government to better leverage its community assets and community partnerships to undertake ARP/CSLFRF projects. Instead of engaging in certain ARP/CSLFRF-eligible projects itself, a local government may issue subawards to qualifying public or private entities to carry out the projects. (Note that for ARP/CSLFRF purposes, a project includes both capital projects and programs.) The subrecipient essentially steps in the shoes of the local government to undertake the project and must comply with the grant Award Terms and Conditions and Uniform Guidance requirements in the same manner and to the same extent as the local government.

State Law Authority

As with all ARP/CSLFRF transactions, a local government must also have state law authority to execute a subaward agreement. Both counties and municipalities have broad authority to enter legal agreements with any private entity “in order to carry out any public purpose that the [local government] is authorized by law to engage in.” G.S. 160A-20.1 (municipalities); G.S. 153A-449 (counties). This includes authority to enter a subaward with a nonprofit or for-profit entity if the purpose of the subaward is something the county or municipality has statutory authority to undertake itself.

Similarly, local governments have authority to enter interlocal government agreements with other government entities to undertake any activity that all parties to the agreement have statutory authority to engage in. See G.S. Ch. 160A, Art. 20. One government may decide to act on behalf of another or they can agree to act jointly, according to the terms of the agreement.

Subaward Process & Substantive Requirements

The relationship between a pass-through entity and subrecipient is often described as an assistance relationship. A local government must monitor and assist the subrecipient to ensure that all laws and regulations are properly followed and that the programmatic milestones are met. A local government ultimately remains legally responsible for the proper expenditure of these funds. As a pass-through entity, a local government must perform a risk assessment on the subrecipient; enter a detailed subaward agreement; and engage in subrecipient monitoring for the duration of the subaward agreement. See 2 CFR 200.331-200.333. The subaward process is complex and requires that both the local government and subrecipient have sufficient capabilities and capacities to meet all the requirements.

Selecting a Subrecipient

There is no competitive process (bidding, RFPs, etc.) required under federal law to select a subrecipient. Generally, a local government is free to grant a subaward to any government, nonprofit, or for-profit entity. (Occasionally a competitive process is required by state law for certain subawards, such as county broadband grants pursuant to G.S. 153A-459.)

There are some threshold standards for a subrecipient, though. First, a local government must check SAM.gov to confirm that the subrecipient is not suspended or debarred. A recipient local government is prohibited from using ARP/CSLFRF funds to enter subawards with parties that are debarred, suspended, or otherwise excluded from or ineligible for participation in federal assistance programs. See 2 CFR 200.214. The government also must address any conflicts of interest, according to its conflicts of interest policy.

A local government may conduct a request for funding (RFF) process that invites external entities to identify ARP/CSLFRF-eligible projects and request funding from the local government. The local government should outline in the RFF parameters eligible Expenditure Categories, required compliance and reporting requirements, and selection criteria. The more detailed guidance a local government provides upfront the easier it will be to identify, select, and subaward to appropriate subrecipients. A local government may use the RFF process to target expenditures to address priority community needs.

Performing Risk Assessment

Once it identifies a potential subrecipient, a local government must ensure that the entity is not only capable of handling the project but also all the federal compliance requirements. A local government must vet a potential subrecipient by performing a risk assessment before entering a subaward agreement. 2 CFR 200.332(b). The risk assessment is a required tool that assembles and synthesizes grant related information to determine the level of potential liability that exists with a subrecipient as an indirect recipient of federal financial assistance. A local government evaluates the risk of each subrecipient for noncompliance with federal statutes, regulations, and terms and conditions of the subaward. This risk assessment is used to determine the appropriate level of monitoring that will be required of the subrecipient by the local government. 2 CFR 200.332(c).

The risk assessment must consider the following factors:

1. The subrecipient’s prior experience with the same or similar subawards;
2. The results of previous audits including whether or not the subrecipient receives a Single Audit in accordance with 2 CFR 200 Subpart F and the extent to which the same or similar subaward has been audited as a major program;
3. Whether the subrecipient has new personnel or new or substantially changed systems; and
4. The extent and results of Federal awarding agency monitoring (e.g., if the subrecipient also receives Federal awards directly from a Federal awarding agency).

2 CFR 200.332(b). It is an invasive process for the subrecipient. The local government will look at the subrecipient’s audits, financial processes and procedures, personnel, internal controls, and more. The results of the risk assessment, including an overall risk ranking, must be documented, and used to dictate the types and degree of subrecipient monitoring.

Either before or during the risk assessment, the local government should discuss all the project specifics, funding amounts, budget and payment terms, and all process, justification, and documentation mandates with the subrecipient. Both parties need to fully understand the nature of the subaward agreement.

Sample Risk Assessment

Here is a sample risk assessment form and below is the corresponding low-medium-high risk scale to evaluate a subrecipient. In this sample, after completing the risk assessment form, based on the overall analysis, the local government will assign one of the following ranks:

A subrecipient’s rank dictates the degree and level of monitoring interventions required by the local government as a condition of the subaward.

Subrecipient Monitoring

Minimum Monitoring Requirements

The local government must develop and implement a subrecipient monitoring plan for the subaward based on the findings of the subrecipient’s risk assessment. At a minimum, the monitoring plan must require the local government to:

1. Review the subrecipient’s periodic financial and performance reports for timely submission, accuracy, and compliance. The reports should be completed at least quarterly;
2. Verify that a subrecipient is audited as required by federal regulations and/or the subaward agreement;
3. Follow-up and ensure that the subrecipient takes timely and appropriate action on all deficiencies pertaining to ARP/CSLFRF award, as detected through periodic reports, audits, or other reviews;
4. Issue a management decision for applicable audit findings pertaining only to the subrecipient’s performance under the ARP/CSLFRF subaward, according to 2 CFR 200.521; and
5. Resolve audit findings specifically related to the ARP/CSLFRF award.

2 CFR 200.332(d) and (f). A local government should establish a process for this review and response. It likely will involve multiple local government personnel, including finance and programmatic staff members. They will work together to accomplish the oversight. And all the requirements must be clearly articulated in the subaward agreement.

Additional Monitoring Requirements

A local government may impose additional monitoring requirements and other interventions if warranted based on the risk assessment. Common monitoring interventions include training for the subrecipient and periodic on-site reviews of the subrecipient’s operations. Other interventions could include requiring payments as reimbursements rather than advance payments; withholding authority to proceed to the next phase until receipt of evidence of acceptable performance within a given performance period; requiring additional, more detailed financial reports; requiring additional project monitoring; requiring the subrecipient to obtain technical or management assistance; and/or establishing additional prior approvals. See 2 CFR 200.332(e) and 2 CFR 200.208.

The specific monitoring plan for each subrecipient, including the type and frequency of reviews, will be detailed in the subaward agreement. A local government is obligated to notify the subrecipient of all additional requirements and specify:

1. The nature of the additional requirements;
2. The reason why the additional requirements are being imposed;
3. The nature of the action needed to remove the additional requirement, if applicable;
4. The time allowed for completing the actions if applicable; and
5. The method for requesting reconsideration of the additional requirements imposed.

Id. All interventions should be narrowly tailored to enable the local government to reasonably monitor compliance and detect and address potential problems early without being overly burdensome to either party to the subaward.

Responding to Problems

A local government also must be prepared to respond to any performance, financial, or compliance deficiencies by the subrecipient. Potential remedies for noncompliance must be spelled out in the subaward agreement. 2 CFR 200.339 provides a nonexclusive list of remedies.

Sample Monitoring Plan

The following is a sample monitoring plan for each risk level. And here is a corresponding monitoring documentation form.

Payment validation: All subrecipient documentation for project expenditures must be reviewed by the local government for compliance with subaward requirements. Any non-compliant expenditures will be denied and the subrecipient will be provided a reasonable description of the reason for denial and an opportunity to cure the deficiency. For a subrecipient on a reimbursement-based payment structure, the validation will occur before a reimbursement payment is approved. For a subrecipient that received an up-front payment, any funds found to have been expended in violation of the subaward requirements must be repaid to the local government.

Report review: A subrecipient must submit quarterly financial and performance reports, based on the schedule set forth in the subaward. The nature and scope of the reports will depend on the project and be spelled out in the subaward. The reports will be reviewed by the local government. Any deficiencies or other performance concerns will be addressed with the subrecipient in a timely manner and could trigger additional monitoring requirements or other interventions, as specified in the subaward.

Desk review: The local government will conduct a meeting to review the subrecipient’s award administration capacity and financial management. The meeting may be held virtually or in person. Topics covered will depend on project scope and subrecipient risk assessment and may include governance, budgeting, accounting, internal controls, conflict of interest, personnel, procurement, inventory, and record keeping. The local government will produce a report which summarizes the results and any corrective actions if deemed necessary. The report will be shared in a timely manner with the subrecipient.

Onsite review: The local government will conduct an on-site meeting at the subrecipient’s location to review the subrecipient’s project performance and compliance. Topics covered will depend on project scope and subrecipient risk assessment and may include project procurement, data systems, activity and performance tracking, project reporting, inventory, and software systems. The local government will produce a report which summarizes the results and any corrective actions deemed necessary. The report will be shared in a timely manner with the subrecipient.

Audit review: The local government must verify that every subrecipient is audited as required by 2 CFR 200 Subpart F (Single Audit) when it is expected that the subrecipient’s Federal awards expended during the respective fiscal year equaled or exceeded the threshold set forth in 2 CFR 200.501. (For profit entities are not subject to the Single Audit.) The local government must obtain a copy of the subrecipient’s Single Audit from the Federal Audit Clearinghouse (FAC). Within six months of the acceptance of the audit report by the FAC, the local government will issue a management decision for any audit findings related to the subaward. The decision will clearly state whether the audit finding is sustained, the reasons for the decision, and the expected auditee action to repay disallowed costs, make financial adjustments, or take other action. (The decision will include reference numbers the auditor assigned to each finding.) The decision will provide a timetable for responsive actions by the subrecipient. Prior to issuing the management decision, the local government may request additional information or documentation from the auditee, including a request for auditor assurance related to the documentation, as a way of mitigating disallowed costs.

Procedures engagement: Applicable only to subrecipients who are not subject to the Single Audit Act. (This applies to for profit entities and other subrecipients whose expenditures of federal funds during a fiscal year do not exceed the threshold set forth in 2 CFR 200.501.) An auditor will perform specific procedures and report on findings. The scope must be limited to the following compliance requirements: activities allowed or unallowed; allowable costs/cost principles; eligibility; and reporting. The review will be arranged and paid for by the local government. The local government will verify completion of the procedures engagement. Within six months of the acceptance of the procedures engagement report, the local government will issue a management decision for any findings related to the subaward. The decision will provide a timetable for responsive actions by the subrecipient. Prior to issuing the management decision, the local government may request additional information or documentation from the subrecipient, including a request for auditor assurance related to the documentation, as a way of mitigating disallowed costs.

Subaward Agreement

The actual contractual relationship between the local government and subrecipient will be defined in a subaward agreement. At a minimum, the subaward must include the following provisions:

• State that the agreement is a subaward;
• Include certain data elements, listed at 2 CFR 200.332(a)(1);
• List the names and contact information for responsible parties in both the local government’s and subrecipient’s organizations;
• Detail all the ARP/CSLFRF Award Terms and Conditions, Uniform Guidance provisions, and other laws and regulations that apply to the subaward;
• Identify minimum monitoring requirements and any additional local government-imposed requirements based on the risk assessment;
• Detail potential interventions if financial, performance, and/or compliance problems are detected during monitoring;
• State indirect cost rate, if applicable;
• Address appropriate records access and retention by subrecipient;
• Specify closeout provisions;
• Summarize in detail the work to be performed by the subrecipient and any performance metrics. Include a performance timeline;
• Include a budget for the subaward, broken down by cost item for ease of allowable review;
• Specify payment information, including timing, and required documentation; and
• Include all regular contract provisions, as required by state law and general contracting principles.

See 2 CFR 200.332.

Final Rule, Award Terms and Conditions, Uniform Guidance Requirements, and Other Applicable Laws

The subrecipient not only agrees to perform an ARP/CSLFRF-eligible project but also to do so in accordance with the Final Rule, the Award Terms and Conditions, Uniform Guidance provisions, and other applicable laws in the same manner and to the same extent as would be required of the recipient local government. (That means that all the references below to recipient apply also to the subrecipient.)

                    Final Rule

A recipient may only expend ARP/CSLFRF funds as outlined in the Final Rule. The Final Rule details specific allowable projects for the ARP/CSLFRF program within four broad categories. It also identifies qualifications, justifications, and documentation requirements for certain types of expenditures. And it provides a list of prohibited expenditures.

Award Terms and Conditions

The ARP/CSLFRF Award Terms and Conditions are detailed here. The major provisions are summarized as follows:

Eligible Use. The recipient may only use ARP/CSLFRF funds for an eligible use, as defined by the ARP/CSLFRF Final Rule. To satisfy the eligibility requirements, a recipient must comply with all justification and documentation requirements imposed by US Treasury for certain Expenditure Categories.

Period of Performance. The recipient may use ARP/CSLFRF funds for eligible costs incurred from March 3, 2021 through December 31, 2024. All ARP/CSLFRF must be expended by December 31, 2026.

Reporting. The recipient must comply with any reporting obligations established by US Treasury for the ARP/CSLFRF. This includes documenting and reporting on required data elements for projects in specified Expenditure Categories.

Maintenance of and Access to Records. The recipient must maintain records and financial documents sufficient to evidence compliance with the ARP/CSLFRF and all applicable regulations. The US Treasury Office of Inspector General and the Government Accountability Office, or their authorized representatives, have the right of access to records (electronic and otherwise) to conduct audits or other investigations. All ARP/CSLFRF records must be maintained for a period of five (5) years after all funds have been expended or returned to US Treasury, whichever is later.

Conflicts of Interest. The recipient must maintain a conflict of interest policy consistent with 2 C.F.R. § 200.318(c). The recipient and any subrecipients must disclose in writing to US Treasury or the pass-through entity, as appropriate, any potential conflict of interest affecting the awarded funds in accordance with 2 C.F.R. § 200.112.

Compliance with Applicable Laws and Regulations. The recipient agrees to comply with the requirements of ARP/CSLFRF, regulations adopted by US Treasury pursuant to the ARP/CSLFRF, and other applicable guidance issued by US Treasury. The recipient also agrees to comply with all other applicable federal statutes, regulations, and executive orders, and the recipient must provide for such compliance by other parties in any agreements it enters with other parties relating to the ARP/CSLFRF award.

Federal regulations applicable to this award include, without limitation, the following:

• • Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, 2 C.F.R. Part 200, other than such provisions as Treasury may determine are inapplicable to this Award and subject to such exceptions as may be otherwise provided by Treasury. Subpart F – Audit Requirements of the Uniform Guidance, implementing the Single Audit Act, shall apply to this award.
  • Universal Identifier and System for Award Management (SAM), 2 C.F.R. Part 25, pursuant to which the award term set forth in Appendix A to 2 C.F.R. Part 25 is hereby incorporated by reference.
  • Reporting Subaward and Executive Compensation Information, 2 C.F.R. Part 170, pursuant to which the award term set forth in Appendix A to 2 C.F.R. Part 170 is hereby incorporated by reference.
  • OMB Guidelines to Agencies on Governmentwide Debarment and Suspension (Nonprocurement), 2 C.F.R. Part 180, including the requirement to include a term or condition in all lower tier covered transactions (contracts and subcontracts described in 2 C.F.R. Part 180, subpart B) that the award is subject to 2 C.F.R. Part 180 and Treasury’s implementing regulation at 31 C.F.R. Part 19.
  • Recipient Integrity and Performance Matters, pursuant to which the award term set forth in 2 C.F.R. Part 200, Appendix XII to Part 200 is hereby incorporated by reference.
  • Governmentwide Requirements for Drug-Free Workplace, 31 C.F.R. Part 20.
  • New Restrictions on Lobbying, 31 C.F.R. Part 21.
  • Uniform Relocation Assistance and Real Property Acquisitions Act of 1970 (42 U.S.C. §§ 4601-4655) and implementing regulations.
  • Generally applicable federal environmental laws and regulations.

Civil Rights Compliance. Recipients must assure compliance with federal Civil Rights laws.

Hatch Act. The recipient must comply, as applicable, with requirements of the Hatch Act (5 U.S.C. §§ 1501-1508 and 7324-7328), which limit certain political activities of State or local government employees whose principal employment is in connection with an activity financed in whole or in part by this federal assistance.

Protections for Whistleblowers. In accordance with 41 U.S.C. § 4712, a recipient may not discharge, demote, or otherwise discriminate against an employee in reprisal for disclosing to any of the list of persons or entities provided below, information that the employee reasonably believes is evidence of gross mismanagement of a federal contract or grant, a gross waste of federal funds, an abuse of authority relating to a federal contractor grant, a substantial and specific danger to public health or safety, or a violation of law, rule, or regulation related to a federal contract (including the competition for or negotiation of a contract) or grant. The list of persons and entities includes the following: A member of Congress or a representative of a committee of Congress; an Inspector General; the Government Accountability Office; a Treasury employee responsible for contract or grant oversight or management; an authorized official of the Department of Justice or other law enforcement agency; a court or grand jury; or a management official or other employee of Recipient, contractor, or subcontractor who has the responsibility to investigate, discover, or address misconduct. A recipient must inform its employees in writing of the rights and remedies provided under this section, in the predominant native language of the workforce.

Uniform Guidance Provisions

As indicated above, as part of the Award Terms and Conditions, a recipient local government (and its subrecipients) must follow the federal Uniform Guidance in implementing ARP/CSLFRF. The Assistance Listing: Coronavirus State and Local Fiscal Recovery Funds specifies the Uniform Guidance provisions that apply to the ARP/CSLFRF grant award:

• Subpart A, Acronyms and Definitions
• Subpart B, General provisions 
• Subpart C, Pre-Federal Award Requirements and Contents of Federal Awards  (except 2 CFR 200.204, .205, .210, and .213)
• Subpart D, Post Federal; Award Requirements (except 2 CFR 200.305(b)(8) & (9), .308, .309, and .320(c)(4))
• Subpart E, Cost Principles 
• Subpart F, Audit Requirements
• 2 CFR Part 25 (Universal Identifier & System for Award Management)
• 2 CFR Part 170 (Reporting Subaward and Executive Compensation Information)
• 2 CFR Part 180 (OMB Guidelines to Agencies on Governmentwide Debarment and Suspension (Non-procurement))

The Compliance and Reporting Guidance: State and Local Fiscal Recovery Funds (V. 4.1, June 17, 2022) (Compliance and Reporting Guide) further fleshes out some of these requirements and identifies reporting data elements for projects in certain Expenditure Categories. Not every regulatory provision will apply to every expenditure of ARP/CSLFRF funds. Some provisions apply regardless of the expenditure (such as conflict of interest, internal controls and financial management processes, eligibility determinations, and allowable cost reviews). Other provisions only apply to certain expenditures/projects (such as procurement, program income, property management, and subawards). Note that there is some question about the applicability of the Uniform Guidance requirements to for-profit subrecipients. As discussed later in this post, I interpret the Uniform Guidance provisions to apply equally to governmental, nonprofit, and for-profit subrecipients.

Other Applicable Laws

According to US Treasury,

[ARP/CSLFRF] recipients must comply with all laws outlined in the [ARP/CSLFRF] Award Terms and Conditions that the recipients accepted in connection with their [ARP/CSLFRF] award and all other applicable executive orders, federal statutes, and regulations in carrying out their [ARP/CSLFRF] award. Recipients must also provide for such compliance by other parties in any agreements it enters into with other parties relating to the award. The award terms listed specific statutes and regulations that apply to the award, but the award terms made clear that these lists were not exclusive. Particularly in the case of the [ARP/CSLFRF], it’s not possible to enumerate the full list of federal statutes, regulations and executive orders that may be applicable to the award given that the range of eligible uses of funds is so broad, including the provision of government services.

Final Rule FAQ 13.10.

A local government will need to identify the specific requirements that apply to the project that is the subject of the subaward and ensure that the subrecipient has the appropriate resources to meet them. This blog postprovides links to sample policies and other implementation tools to comply with the major requirements.

Sample Subaward Agreement

Here is a subaward agreement template. A local government should work with its attorney to review the template and draft and execute the subaward agreement.

Subaward Policy

A local government must adopt a subaward policy to guide its implementation of subawards, including risk assessments and subrecipient monitoring. The policy should assign roles and responsibilities within the local government for executing subawards.

Sample Subaward Policy

A sample subaward policy is available here.

Subawards to For Profit Entities

As stated above, US Treasury has interpreted the ARP/CSLFRF to authorize local governments to subaward the funds to other governments, nonprofits, and for-profit entities. For-profit entities are not typical subrecipients, though. It is far more common that a for-profit entity be a contractor than a subrecipient. If a local government subawards to a for-profit entity, the local government may have to work more closely with the for-profit entity to help it understand its obligations under a subaward (and how they differ than the obligations under a federal contract.) One issue that is likely to arise is the applicability of Uniform Guidance provisions to the for-profit subrecipient. That is because the Uniform Guidance provisions do not generally apply, by their terms, to for-profit entities. Instead, they apply to non-Federal entities, defined as “a State, local government, Indian tribe, Institution of Higher Education (IHE), or nonprofit organization that carries out a Federal award as a recipient or subrecipient.” 2 CFR 200.1. Further, US Treasury states the following in its Final Rule Supplement:

Treasury is maintaining the monitoring and subrecipient reporting requirements outlined in the final rule. Per 2 CFR 200.101 (b)(2) of the Uniform Guidance, the terms and conditions of federal awards flow down to subawards to subrecipients. Therefore, non-Federal entities, as defined in the Uniform Guidance, must comply with the applicable requirements in the Uniform Guidance regardless of whether the non-Federal entity is a recipient or subrecipient of a federal award. This includes requirements such as the treatment of eligible uses of funds, procurement, and reporting requirements.

Because the definition of non-Federal entity does not include for-profit entities, one interpretation of these provisions is that when a local government subawards ARP/CSLFRF funds to a for-profit subrecipient the Uniform Guidance provisions do not apply to that subrecipient. Under this interpretation, although a for-profit subrecipient must follow ARP/CLSFRF Award Terms and Conditions and other applicable laws and performance requirements, it would not have to abide by Uniform Guidance provisions.

This interpretation, however, seems inconsistent with the Award Terms and Conditions, directives in other provisions in the Final Rule Supplement, and the Compliance and Reporting Guide. It would mean that different process and substantive provisions would apply to the expenditure of ARP/CSLFRF funds for the exact same purpose, depending on whether the local government sub-awarded to a nonprofit or government entity versus a for-profit entity. There is nothing in the Final Rule or other guidance that indicates that US Treasury intends this different treatment.

In fact, the section of the Final Rule Supplement addressing Uniform Guidance specifically, states:

Recipients of [ARP/CSLFRF] funds are subject to the provisions of the Uniform Guidance (2 CFR Part 200) from the date of award to the end of the period of performance on December 31, 2026 unless otherwise specified in this rule or program-specific guidance. Costs must follow the requirements in 2 CFR 200 Subpart E, Cost Principles, including procurement standards. Recipients that receive an aggregate amount of federal financial assistance in a given fiscal year that exceeds the Single Audit threshold are subject to the requirements in 2 CFR 200 Subpart F, Audit Requirements, unless otherwise specified in program-specific guidance.

[ARP/CSLFRF] funds transferred to subrecipients are also subject to reporting and Uniform Guidance requirements.

. . .

Recipients should refer to the Assistance Listing for details on the specific provisions of the Uniform Guidance that do not apply to this program. The Assistance Listing is available on SAM.gov. Additional changes to compliance and reporting guidelines, including any clarifications on Uniform Guidance requirements, will be addressed in Compliance and Reporting Guidance and the User Guide.

US Treasury Final Rule Supplement, pages 373-74 (emphasis added). And, as indicated above, the Final Rule Supplement also states:

As detailed in the interim final rule Supplementary Information, once transfers are received, the transferee must abide by the restrictions on use applicable to the transferor under the ARPA and other applicable law, regulations, and program guidance. Further, the transferor remains responsible for monitoring and overseeing the subrecipient’s use of [ARP/CSLFRF] funds and other activities related to the award to ensure that the subrecipient complies with the statutory and regulatory requirements and the Award Terms and Conditions. Recipients also remain responsible for reporting to Treasury on their subrecipients’ use of payments from the SLFRF for the duration of the award.

Id. at page 359 (emphasis added). Further, Final Rule FAQ 1.8 verifies that nonprofit and other private entities may receive ARP/CSLFRF funds as subrecipients “as long as they comply with the [ARP/CSLFRF] Award Terms and Conditions and other applicable requirements.” And, as detailed above, the Award Terms and Conditions specify, among other things, that

Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, 2 C.F.R. Part 200, other than such provisions as Treasury may determine are inapplicable to this Award and subject to such exceptions as may be otherwise provided by Treasury. Subpart F – Audit Requirements of the Uniform Guidance, implementing the Single Audit Act, shall apply to this award.

There are several other references to these requirements in the Final Rule Supplement and Compliance and Reporting Guide and none support differing treatment of for-profit subrecipients versus government or nonprofit subrecipients.

How then should local governments treat the applicability of Uniform Guidance provisions to for-profit subrecipients? There is an alternative interpretation of the relevant provisions that I believe results in a more consistent treatment of these grant funds.

Despite the definition of non-Federal entity, a federal agency may make the Uniform Guidance provisions applicable to for-profit entities. See 2 CFR 200.101(a)(2). There is no specific statement in the ARP/CSLFRF, Final Rule, or other guidance to this effect. But arguably US Treasury has applied Uniform Guidance to for-profit subrecipients of ARP/CSLFRF funds by implication.

Recall that when a local government subawards federal grant funds, it is acting as a pass-through entity, defined as a “non-Federal entity that provides a  subaward to a subrecipient to carry out part of a Federal program.” 2 CFR 200.1. And the definition of a subrecipient is “an entity, usually but not limited to non-Federal entities, that receives a subaward from a pass-through entity to carry out part of a  Federal award; but does not include an individual that is a beneficiary of such award.” Id. (emphasis added). Thus, the Uniform Guidance, itself, recognizes that a subrecipient may not be a non-Federal entity. And the Final Rule Supplement directs that a local government follow 2 CFR 200.331-200.333 in awarding subawards to governmental, nonprofit, AND for-profit entities. See Final Rule Supplement, pages 358-359. Among the requirements in 2 CFR 200.332(a)(2), a local government acting as a pass-through entity must include in a subaward “all requirements imposed by the pass-through entity on the subrecipient so that the Federal award is used in accordance with Federal statutes, regulations and the terms and conditions of the Federal award.” Putting this together, a local government, which is clearly a non-Federal entity to which the Uniform Guidance provisions in the Assistance Listing apply, must flow down all these requirements to the subrecipient, regardless of whether the subrecipient is a non-Federal entity. In other words, the Uniform Guidance provisions apply directly to the recipient local government, as a non-Federal entity. The local government as pass-through entity then imposes these requirements on the for-profit subrecipient through the subaward process. The subrecipient must comply with all applicable regulations, including process and substantive requirements, to the same extent as the recipient local government would have. (With the exception of the audit requirements, which may vary by type of subrecipient and amount of subaward.) That is the very nature of the pass-through arrangement, and it allows the recipient local government to fulfill its reporting and compliance requirements with respect to the ARP/CSLFRF award.

Thus, even though the definition of non-Federal entity does not include for-profit entities, I think there is a strong argument that the Uniform Guidance provisions apply to a for-profit subrecipient to the same extent that they would apply to a government or nonprofit subrecipient. There is one exception that is noted in the Compliance and Reporting Guide. In footnote 5, US Treasury states that “[f]or-profit entities that receive [ARP/CSLFRF] subawards are not subject to Single Audit requirements. However, they are subject to other audits as deemed necessary by authorized governmental entities, including Treasury and Treasury’s [Office of Inspector General].” A local government will need to include appropriate audit guidance in its subaward to a for-profit entity to enable the local government to meet its reporting and audit compliance obligations.

Of course, US Treasury could modify any of these requirements. And we may get further guidance from US Treasury through the Final Rule FAQs to clarify this issue. In the meantime, a local government should consult with its own attorney about this and any other legal interpretative issues. (This is certainly not the only interpretative grey area in the ARP/CSLFRF!)

Subaward Checklist

The following provides a checklist guide for a local government implementing a subaward.

Step 1: Adopt a subaward policy that is consistent with the ARP/CSLFRF Final Rule, Award Terms and Conditions, and Uniform Guidance requirements. (Sample subaward policy here.)

Step 2a: Identify an ARP/CSLFRF-eligible project that the county or municipality has state law authority to undertake. Clearly define the nature and scope of the project and, if applicable, identify intended beneficiaries.*

Step 2b: Identify one or more potential external partners for the project.* Collect sufficient information from each external entity to do a preliminary review (official name, address, corporate status, federal identification numbers, prior audits, etc.).

*A local government may wish to conduct a request for funding (RFF) process that invites external entities to identify ARP/CSLFRF-eligible projects and request funding from the local government. A local government should provide clear parameters about types of eligible projects, amounts available, timeline, compliance requirements, and selection criteria to make the RFF process more manageable.

Step 3: Once an external entity is identified, determine whether the relationship with the external entity is a contractual or subrecipient relationship. Document the determination on this form.

Step 4: Check SAM.gov to see if the external entity is suspended or debarred. Also identify and address any conflicts of interest.

Step 5: Perform and document a risk assessment of the subrecipient, including review of the subrecipient’s past audits. (Sample risk assessment form here.) Assign an overall risk level to the subrecipient, which will dictate the monitoring interventions. Before or during the formal risk assessment, inform the subrecipient what will be required to undertake the project and meet all the federal compliance requirements. Ensure that both the local government staff and the subrecipient staff have sufficient capabilities and capacity to meet the requirements.

Step 6: Work with the subrecipient to clearly define the project parameters, scope, and timeline and identify performance metrics. Discuss all specific compliance and reporting requirements and provide templates or other guidance if appropriate. Outline terms of subaward agreement. Formulate a project budget that is broken down by cost item. Perform initial allowable cost review, according to the local government’s allowable cost policy. Map out a plan for accomplishing any subaward prerequisites.

Step 7: Draft and execute subaward agreement with subrecipient. (Subaward agreement template here.)

Step 8: Engage in subrecipient monitoring according to the terms of the subaward agreement. Document all monitoring interventions. (Sample monitoring form here.) Respond to any financial, performance, and/or compliance deficiencies in a timely manner.

Step 9: Report on required subaward data in periodic Project and Expenditure Reports.

Step 10: Retain all subaward documentation for at least five (5) years after the end of the ARP/CSLFRF award term.

[1] To add to that confusion, for Project and Expenditure Report purposes, US Treasury uses the term “subaward” to mean two different things. First, it covers all contractual agreements, aside from beneficiary payments. But elsewhere in the report it also refers to the more specific agreements described in this post.